Facebook’s corporate governance is weak, this fund manager says

Is Facebook’s corporate governance weak?

Ahead of its quarterly financials due next week, Facebook (Facebook Stock Quote, Chart NASDAQ:FB) shareholders will be looking for some positive results from a company and stock that have had a rough ride over 2018.Things could get a lot worse, says Bryden Teich of Avenue Investment, who thinks that the regulatory storm brewing could hit the social media giant hard.

It was almost three months ago now when Facebook made headlines for all the wrong reasons, losing over US$123 billion in value — the largest one-day drop in US market history —as investors reacted to weaker-than-expected revenue for Q2, underwhelming daily active user numbers and a management guidance which predicted a slowdown in revenue growth over the second half of 2018.

And while all of the FAANG group of US tech stocks have suffered losses over the past month, Facebook’s plunge might be more difficult to overcome by comparison, as the company faces concerns on a number of fronts. Impending regulation from governments less at ease with the information and free expression free-for-all at the core of Facebook’s platform would be one of them, but privacy leaks, election meddling and the recent jumping ship by key management players are also dogging the company.

On that last front, Brendan Iribe, former CEO and co-founder of VR/AR company Oculus, announced today that he would be leaving Facebook four years after it acquired Oculus and two years after another Oculus co-founder Palmer Luckey quit Facebook. The news comes in a year which has already seen Facebook departures by Instagram co-founders Kevin Systrom and Mike Krieger as well as by WhatsApp’s Jan Koum.

Reports have suggested that tensions have increased this year between CEO Mark Zuckerberg and a number of Facebook’s acquired start-ups, and while governance issues do present a problem, says Teich, partner and portfolio manager at Avenue Investment, it’s the regulatory challenges that are likely to be most impactful.

“There’s a cloud hanging over Facebook,” says Teich. “The corporate governance there is not strong, as well”.

“I think the big risk for this space continues to be the regulatory hammer that’s eventually coming down. It hasn’t happened yet but regulatory moves like that came be slow but when they do come they can be pretty punitive,” said Teich, in conversation with BNN Bloomberg.

“Facebook has definitely been a whipsaw the past few months,” he says. “It’s not a name we own. We looked at it when it had sold off aggressively in the spring after the Cambridge Analytica issue. It just doesn’t fit into the valuation or the bucket that we’re looking to fill right now with regards to US technology.”

“There’s a cloud hanging over Facebook,” says Teich. “The corporate governance there is not strong, as well”.

Last week, several major shareholders including the pension funds of New York City and the state treasurers of Rhode Island, Illinois and Pennsylvania made a public call for Zuckerberg to step down as chairman of the company, citing the need for more independence and accountability on behalf of the company’s boardroom.