Facebook's Year of the Dragon
"Facebook's Year of the Dragon"
By Jeffrey Sonnenfeld
Published May 18, 2012, by the Washington Post
Read the commentary in its original context on the Washington Post website.
If there is anything more eye-popping than the surging demand for Facebook's public equity, it's the number of articles discussing its $100 billion-plus initial public offering of stock.
What's left to say about this deal? Despite some new, disconcerting investor and consumer data regarding Facebook, missing from this frothy discussion is serious reflection on the longer lessons about living with a genius CEO.
Investing in the company, after all, means investing in founder Mark Zuckerberg—the 28-year-old, hoodie-draped "face" of Facebook—while standard good-governance practices are shelved.
Ominously, 2012 is the Chinese year of the dragon. Studies of business folk heroes remind us that, like authentic national and spiritual heroes, those who are self-styled redeemers or dragon-slayers in their early careers can grow to resemble dragons themselves by late career.
(Caught up in the frenzy, I admit I intended, perhaps unwisely, to buy a pre-open allocation of this hot offering from my broker. However, as a board member of a public company, even one unrelated to Facebook or to its equity underwriters, I and other directors were excluded from such deals by nervous compliance officers.)
It's hard to resist: The Harvard dropout has built a business with 900 million users and more than $1 billion in revenue just last quarter. Even so, the frenzy has not been without its skeptics. Half of all Americans think that Facebook is a passing fad and that the stock price is overvalued, according to an Associated Press-CNBC poll released last week. Active investors were even more cynical.
As for consumers, the same poll reported that three of five Facebook users say they have little or no faith that the company will protect their personal information. Only 13 percent trust Facebook to protect their data; a meager 12 percent would feel safe making purchases through the site. Not surprisingly, most Facebook users—57 percent—say they never click on Facebook ads or sponsored content; 25 percent say they rarely do so.
With 82 percent of Facebook users, then, not interested in its revenue-generating service, its core business model might need tweaking. Just last week, the nation's third-largest advertiser, General Motors, said it will no longer advertise on Facebook.
Tech is tricky business. Other hot stuff companies have faltered after their IPOs: Groupon's share price is down 66 percent from its 2011 initial offering. Zynga's shares are off 20 percent since it went public, and Pandora is down 44 percent. Vonage, the highly touted voice-over-internet provider, went public in 2006 with an opening trading price of $17 a share. Within a day, it had fallen 24 percent and now trades on the edge of $2 a share.
Most dramatic of all is social-media pioneer Myspace, which was founded in 2003 and acquired by News Corp. two years later for $580 million. For a time, Myspace was the most-viewed social-networking site in the world—and even surpassed Google in 2006 as the most-visited Web site in the United States. Two years later, it was overtaken by Facebook and was ultimately sold last summer to an investor group including Justin Timberlake for $25 million.
It is critical that fast-growing, innovative enterprises created by visionary leaders not believe their own hype and the mythmaking of the marketplace. A board plays a key role in this. Ideally, it grounds its leader in reality while also supporting creative, calculated risk-taking. Ultimately, the board must be able to speak truth to power. And it must be on the lookout for grandiose and reckless conduct.
Even highly sophisticated boards fall victim to the charismatic swagger of "monarchic" founders. For instance, Yahoo's board—chock-full of financiers, technologists, and media moguls—complied with founder Jerry Yang's misguided strategic influence. At Chesapeake Energy, a board made up of energy experts, financiers, and renowned former public officials failed to keep founder Aubrey McClendon from running up company debt and engaging in egregious conflicts of interest. At Best Buy and News Corp., boards failed to exercise timely, independent outside reviews of internal misconduct.
History offers many other examples of self-destructive CEOs: Ed Land of Polaroid, Ken Olsen of Digital Equipment, William Black of Chock Full O'Nuts, Juan Trippe of Pan American World Airlines and Dick Fuld of the reborn Lehman Brothers, to name a few. Land held 533 patents, second only to Thomas Edison as an inventor, but could not accept the emergence of new imaging and video technologies, and Polaroid lost its innovative edge. Olsen created the world's second-largest computer company but failed to capitalize on the shift to personal computing. The original coffee-house chain with branded premier coffee, Chock Full O'Nuts, was led by Black for 61 years—including the last two, 1981-83, when he was incapacitated at Massachusetts General Hospital.
These all were once path-breaking enterprises that generated news-media enthusiasm akin to the Facebook frenzy. Blinded by what they perceived as their brilliant strategic visions, these leaders sabotaged hapless successors and led to the demise of the companies they built. The enablers were individually savvy but collectively complacent board directors.
The great anthropologist Joseph Campbell's classic study "The Hero With a Thousand Faces" shows how this leadership pathology is manifest across sectors, centuries, continents, and cultures. Like biblical kings, early-career heroes can develop into later-career villains. Such ruthless dictators as Zimbabwe's Robert Mugabe, Ferdinand Marcos of the Philippines, Cuba's Fidel Castro, and the Shah of Iran were all early-career social redeemers and national liberators who emerged as tyrants. Dragon-slayers morphed into near-dragons themselves.
At Facebook, Zuckerberg's power is almost total. Despite selling more than $1 billion of stock and having 28 percent of the equity, he has maneuvered classified shares to maintain 57 percent control of Facebook voting stock—expected to be worth $28 billion.
He has built the company, but not without missteps. Facebook's privacy policies have drawn sanctions from the Federal Trade Commission. When Zuckerberg brazenly settled a bid to acquire photo-sharing service Instagram for $1 billion, Facebook's board was "told, not consulted," according to news reports. The deal hit an apparent antitrust regulatory hurdle on the eve of the IPO. And on the roadshow to pitch Facebook to investors, Zuckerberg subjected audiences to a 20-minute video in place of live exchanges. Met with ridicule, the video was pulled.
How to steer a young dragon-slayer CEO? The answer is not for boards to go to war with their creative geniuses by trying to suppress them. Nor is it to fire them, as the board of Apple did to Steve Jobs five years after its successful launch, as JetBlue's board did to its founder, David Neeleman, and the Gap did to Mickey Drexler after he took the retailer from $480 million in sales to roughly $15 billion. Staples should never have pushed out its imaginative founder, Tom Stemberg. Holiday Inns' visionary founder, Kemmons Wilson, and the founder of KFC, "Colonel" Harlan Sanders, spent the last third of their lives battling their enterprises from the outside.
The right answer is for a board to develop governance practices that show they know how to partner with the genius they are privileged to have among them. The boards of Microsoft, Amazon, Dell, Starbucks, and, ultimately, Apple figured out how to work with Bill Gates, Jeff Bezos, Michael Dell, Howard Schultz, and Steve Jobs. In fact, some firms, such as Intel, have shown that they can collaborate with maverick leaders and even groom generations of innovative leaders. These boards, having forged alignment between the needs of their founder CEOs and their shareholders, offer lessons for Facebook's board and investors.
1. Zuckerberg wants the world to be different for his having been alive, and Facebook is his instrument for a lasting legacy. Facebook must understand and anticipate the near-messianic righteousness of Zuckerberg's mission. The heroic quest is a drive for immortality, which fuels superhuman goals, but the enterprise need not share the founder's mortality. Boards can help founders appreciate and address their human frailties, whether with non-accusatory accountability (as with Gates through Microsoft anti-trust litigation) or during health crises (Jobs' battle with cancer and need for credible succession plan).
2. Fortify the founder's heroic stature. At some later stage, they may need to define meaningful projects and roles that celebrate the CEO's contribution and quest for a lasting legacy. Similarly, they might find titles and events that pay tribute to their founding CEO's stature. Titles such as "chairman," "founding chairman," "chairman emeritus," and "chief creative officer" have long been used by retailers and fashion companies without getting into testosterone-fueled battles over titles. A lead director or presiding director can have the authority to convene board meetings and establish the agenda without a demeaning, distracting title battle.
3. Maintain integrity at the top. The Facebook board will need to have the backbone to show it is uncompromising in clarifying collective values that bind the CEO to all others in the firm. Past CEOs at firms such as HP, Yahoo, Wal-Mart, Boeing and Best Buy believed that company policies regarding bribery, sexual misconduct and fraudulent representations didn't apply to them. There was confusion about where the CEO's pockets ended and shareholders' pockets began in the use of resources and personal expenses. Integrity must be modeled at the top for any credible compliance in the firm.
4. Challenge the almighty. Facebook board members need the competence to feel that they have standing to question the almighty founder. Directors and the CEO must agree on a process of strategic review and enlist regular independent outside expertise—whether for objective investigations or for the empowerment of board directors to counter the knowledge possessed by the founder. At Facebook, advertising disaffection cannot be swept under the carpet.
5. Offer constructive advice and trusted counsel. The Facebook board is clearly aware of Zuckerberg's eagerness to avoid hostile oversight. He may be reluctant to admit mistakes and allow himself to become vulnerable as Jobs, Neeleman or Drexler once did. Without challenging feedback, however, groupthink can set in, and learning will cease. The trusted mentoring relationship Zuckerberg has with Don Graham of the Washington Post is a promising resource here. Having the trusted chief operating officer Sheryl Sandberg officially seated on the board would help further.
Sigmund Freud reminded us that society is changed by its discontented. Painter Robert Motherwell confessed that as an artist there is never satisfaction, because creative joy is mixed with the anguish of what could be. As artists sneak into the gallery at night to touch up paintings, Zuckerberg's board must appreciate his need for constant improvement as key to the firm's growing value. At the same time, they must recognize that this artist is no longer in his private studio but is using other people's resources, and so must listen to their voices. In short, this board has a dragon by the tail, but it better learn fast how to ride it in partnership.
Jeffrey Sonnenfeld is a senior associate dean and a professor of management practice at the Yale School of Management. He is the author of "The Hero's Farewell."