Some of Meta’s biggest shareholders have lined up to vent their anger at the social media company’s management after it surprised Wall Street with plans to ramp up its loss-making effort to build the metaverse.
Even after a slump that wiped out 74% of Meta’s share price in just over a year, investors and experts said there was little outsiders could do to stop Chief Executive Mark Zuckerberg from using his majority control to move forward. with a bet that lost Wall Street’s support.
Meta shares tumbled 25% on Thursday after the company revealed losses at its Reality Labs division, which is building the metaverse, would grow “significantly” in 2023 after hitting $9.4 billion. (R$ 50 billion) in the first nine months of this year. Investors were also surprised by another jump in capital spending that Meta said will consume up to $39 billion next year, more than double the 2021 level.
“If any other company had done this, there would have been activist investors writing letters, proposing alternative directorships, demanding change,” said Jim Tierney, director of US growth investment at AllianceBernstein, a shareholder in Meta. “I think Mark clearly heard what the investors wanted. And he made his decision.”
The anger spilled over to board meetings, some of which Zuckerberg attended in person after Meta shocked Wall Street with its spending plans on Wednesday.
“There seems to be a sense of frustration” among investors over the company’s rising costs, said a person familiar with the discussions.
Referring to the series of informal follow-up calls with investors after the company announced its earnings on Wednesday, Tierney said, “When people called the company, they were more angry, not less.”
“Zuckerberg has been deaf to the investment community, doubling down on everything,” said David Older, equity director at 33.2 billion euros ($171 billion) asset manager Carmignac, which has stakes in Amazon, Microsoft and and Google, but not in Meta. “The metaverse timeline is very long. I don’t think you’ll know if it’s the right measure for five or ten years.”
Asked what impact shareholder unhappiness would have on its plans, Meta said: “We value the views of our investors and regularly engage with them to ensure we are aware of their prospects.”
Like many companies, Meta often holds meetings in the days following the quarterly earnings report, although Zuckerberg’s total personal control means he can ignore other opinions. Meta’s co-founder owns 13% of the company’s capital, but controls 54.4% of the votes through a special class of shares.
Meta did not comment on whether the complaints caused renewed discussion within the company about the scale of its spending. She said, “Meta’s management team, with oversight from the Board of Directors, is focused on executing the company’s top priorities with the aim of creating long-term shareholder value.”
Shareholder frustration with Zuckerberg’s personal control over Meta has escalated in recent years as the company found itself at the center of repeated controversies over misinformation and privacy, while betting big on the metaverse. A shareholder proposal to eliminate super-voting shares won 28% of the vote at Meta’s annual shareholders meeting earlier this year, despite Zuckerberg’s majority stake. This surpassed the 17% support a similar proposal received in 2014.
Legally, Meta directors have a responsibility to represent all shareholders, even if the chief executive controls who is elected to the board, said Steve Diamond, a corporate governance expert at Santa Clara University School of Law. A court can intervene on behalf of shareholders if a board engages in “wasting” company resources, although that is “a very high standard to meet” and has almost never been upheld, he added.
“I’m surprised at how much they’ve spent [no metaverso]and they have little to show for it,” Diamond said. “If it was any other CEO who only had a 1% stake, he probably would have walked away.”
The lack of any formal avenues to change the company’s direction has forced aspiring shareholder activists to adopt a conciliatory approach. In an open letter to Meta’s directors shortly before the last report last week, Brad Gerstner of Altimeter Capital resorted to flattery to try to get the chief executive’s attention. He praised Meta’s business, before urging the company to cut at least 20% of its employees, reduce its capital spending by $5 billion and cap annual spending in the metaverse to $5 billion.
“Everyone agreed with Brad Gerstner’s open letter to Zuckerberg,” said Carmignac’s Older. “You can have a great stock and still invest $5 billion a year in the metaverse, but you have to be disciplined on costs and disciplined on how you’re investing.”
In a call with analysts on Wednesday, Meta executives tried to avoid the fuss by pointing out that 82% of the company’s spending last quarter was on its existing services, not the metaverse.
Some tech investors have said Zuckerberg may be justified in pushing aggressively, given the scale of risk his company is facing. Apple’s decision to limit the data apps can collect on its devices has severely hurt Meta’s ad revenue and appears to have convinced his boss that he had no choice but to try to build the next major computing platform, Kevin said. Landis of Firsthand Funds.
The huge shifts in value seen during previous significant transitions in the digital world could also account for Zuckerberg’s tendency to ignore dissenting opinions and move on, Landis suggested. “If this were a classic governance structure, we would have committee decision-making and discussions would be endless,” he said.
Much of the unhappiness stemmed from Meta’s failure to come up with a timeline for when the spending spree could pay off, Tierney said. “They’re spending $15 billion a year in the metaverse and they can’t give us any mile markers. It’s just great hope.”
Translated by Luiz Roberto M. Gonçalves