In 2014, a shareholder derivative suit was filed in the Delaware Courts alleging that the Facebook Board of Directors violated their duties to their shareholders by paying its nonexecutive directors 43% more than “peers,” despite its net income and revenues being 66% and 49% lower, respectively, than its peers. The peers named in the suit included Adobe, Amazon, Cisco, eBay, EMC, LinkedIn, Netflix, Qualcomm, SAP AG, The Walt Disney Company, VMware, and Yahoo!, Inc. The suit noted that in 2013, the Facebook Board paid its nonexecutive members an average $461,000 per director, 43%, or $140,000 higher than the average per director compensation in Facebook’s Peer Group. It further noted that the Board is free to grant its board members an unlimited amount of stock as part of their annual compensation under a 2012 equity incentive plan, with the only limit a $2.5 million share limit per director in a single year (worth approximately $145 million at the time of filing). The Facebook Board at the time consisted of eight individuals, six of whom were “outside” (i.e., nonemployee) directors including Lead Independent Director Donald Graham, and Directors Peter Thiel, Marc Andreessen, Reed Hastings, Erskine Boles and Desmond-Hellman. Inside directors included founder and CEO/Chairman Mark Zuckerberg and COO Sheryl Sandberg. The lawsuit alleged that all of the Directors approved the compensation and all of the nonexecutive directors received the compensation. The lawsuit claimed breach of fiduciary duty, waste of corporate assets, and “unjust enrichment.” The issue of director compensation accelerated in late 2014, when Jan Koum, WhatsApp cofounder and CEO, joined the board and received a salary of $1, but stock awards worth over $1.9 billion, representing a sign-on award of $25 million restricted stock units when Facebook acquired WhatsApp. However, Facebook CEO Mark Zuckerberg allegedly approved the stock grants in a written affidavit, rather than at a stockholder meeting—and with 60% of the voting power, he had the ability to approve whatever he wanted. The question remains as to whether Mark Zuckerberg failed to comply with Delaware corporate law, where the company is incorporated, in circumventing shareholders by signing off on directors’ stock grants instead of presenting it at a shareholders’ meeting.
- Do you believe that directors have the right to approve their own compensation without taking it to shareholder vote? Please justify your answer and explain what might or might not warrant this.
- Did Zuckerberg break the law by not bringing the compensation issue up in a stockholder meeting?
- What is an appropriate level of director pay? Is the proposed compensation in the Facebook situation excessive? How might this be determined?
- Institutional Shareholder Services, a proxy advisory firm, has noted that there is “too much work and too much time” required of directors; could this justify higher director pay?