Facebook’s Faustian bargain
In the run-up to Facebook’s IPO in May, Henry Blodget explained just what it was that made Mark Zuckerberg a great CEO: his ultra-long-term time horizon. “It often takes decades to build the sort of companies that the best executives and entrepreneurs hope to create,” wrote Blodget, explaining that Facebook’s dual-class share structure, and Zuckerberg’s control of the company, would allow the young CEO to build a company for the ages, rather than one which hurt itself by chasing short-term profits.
When talking about Zuckerberg’s most valuable personality trait, a colleague jokingly invokes the famous Stanford marshmallow tests, in which researchers found a correlation between a young child’s ability to delay gratification—devour one treat right away, or wait and be rewarded with two—with high achievement later in life. If Zuckerberg had been one of the Stanford scientists’ subjects, the colleague jokes, Facebook would never have been created: He’d still be sitting in a room somewhere, not eating marshmallows…
Companies are a lot more than ticker symbols. They create jobs that employ people. They create products that help people. They devote resources to ensure that they’ll keep creating this value for decades, despite the fact that these investments reduce their near-term profits. In other words, these companies create societal value. As Warren Buffett and a handful of other investors have often observed, this balanced approach allows such companies to create huge value for some shareholders: the ones who stay put for the long term.
But where are we now, just three months after Facebook went public? Dalton Caldwell’s blog post about Facebook has gone viral this week because it seems to depict a company which, having gone public, is doing the exact opposite of the kind of things that Blodget so admires. Caldwell built a Facebook app, but was then told by Facebook that because it had embarked upon a similar project internally, he basically had two choices: be taken over and shut down by Facebook, or just be shut down by Facebook. Dalton wrote, in an open letter to Zuckerberg:
Mark, I don’t believe that the humans working at Facebook or Twitter want to do the wrong thing. The problem is, employees at Facebook and Twitter are watching your stock price fall, and that is causing them to freak out. Your company, and Twitter, have demonstrably proven that they are willing to screw with users and 3rd-party developer ecosystems, all in the name of ad-revenue. Once you start down the slippery-slope of messing with developers and users, I don’t have any confidence you will stop.
The point here is that although Facebook might be controlled by Zuckerberg individually, it’s still nothing without its thousands of employees. And those thousands of employees have entered into a bargain with Zuckerberg: they’ll accept relatively modest salaries, and work hard, because Zuckerberg is giving them substantial amounts of equity in the company. Once Facebook went public, every single Facebook employee became acutely aware of the company’s share price, what direction it was going in, what that move was doing to their net worth, and what public investors wanted to see from the company (revenues, and profits, rising sharply).
As such, despite his voting control at board level, it’s actually really hard for Zuckerberg to keep his employees focused on long-term platform-building, rather than short-term obsession over the share price. For one thing, they don’t own the company; many of them are going to leave, at some point, and so their time horizon is necessarily going to be shorter than Zuckerberg’s. And at any company with broad share ownership and a public share price, employees are always going to pay a huge amount of attention to whether it’s going up or going down.
On top of that is the classic Silicon Valley problem — which is that employees are always searching for the new new thing, the company where they can get early-stage equity and make themselves a fortune. Or, at the very least, join a mature company like Apple where the stock can still rise enormously. If Facebook’s stock is going down rather than up, its employees will start looking for other opportunities, and the company will find it much harder to attract talent.
Facebook has a lot of money and a lot of great employees, and so should by rights have the luxury of spending both money and its employees’ time in the service of building a platform for the ages. In practice, however, now that Facebook has gone public, it doesn’t work like that. The markets want to see quarterly results — and the employees’ incentives are aligned more with the markets than they are with Zuckerberg. He might have been a very good CEO of a private company. But trying to run a public company, as he’s discovering, is very different.