Facebook has stayed private longer than anyone expected, but news reports suggest the pressure to create a market for its current investors is mounting from the lucky employees who own restricted stock as well as the array of outside investors who purchased shares in private offerings and want to cash in their gains. Thus, the day seems to be approaching for what will be a monster Initial Public Offering. Even if a down market reduces the initial share price, the IPO will certainly swamp the market capitalization of long-standing industrial strength public companies like Boeing and Dupont.
I have never met Zuckerberg and I don't know for sure why he has resisted going public for so long. After all, with close to one billion users and growing, he could have floated a successful offering when Facebook was a fraction of its current size. Yet it's not hard to come up with reasons for his reluctance. There is a lot of baggage that comes with being a publicly traded company, especially the pressure to curb future investments in R&D that might reduce earnings and the price of the stock, yet are critical to Facebook's culture of innovation and their ability to stay at the cutting edge of technology and consumer preferences.
Ironically, once a company goes public, it already has what it needs from the public market -- cash to fuel the enterprise for the foreseeable future. As Roger Martin reminds us in Fixing the Game, the after-market in buying and selling publicly traded shares, and the noise generated by earnings and price expectations that flow from that going-public moment, are for everyone else in the game -- especially the short-term traders and speculators.
There's a rumor circulating that the prospectus for the Facebook IPO is being written in-house, rather than by the usual assemblage of lawyers and bankers hired to document, price and market the stock. If true, this could be a good sign, evidence that Zuckerberg and his team are staying attuned to the conditions for retaining a culture oriented to a future of innovation. Still, a bit of outside advice may be in order, from those who have walked this line before. I would suggest that Zuckerberg and his IPO team pay special attention to these three factors:
First, begin with your purpose: Facebook might take a page from Google founders, Larry Page and Sergey Brin, who offered up "An Owner's Manual for Google Shareholders" in the form of a widely-cited letter to current and future investors. They led with their goals as a company -- "to develop services that improve the lives of as many people as possible, to do things that matter" and providing "unbiased, accurate and free access to information for those who rely on us around the world" and declared short-term obsession with share-price movements off limits. That is a great start.
Second, pay close attention to how you reward your management team. Increasingly, the granting of stock -- in the form of options, or other stock-based incentives -- is under the microscope. Why? Because, stock-based compensation too often results in managers taking short-term risks to pump the stock price, leaving messes for those who follow. An idea that emerged out of academia in the 1970s is the primary rationale behind stock-based compensation -- that the only way to ensure that managers are "aligned" or "work for" the shareholders is to load them up with stock. Today, that idea is under a lot scrutiny, and for good reason. Your employees will do what they are paid to do, and if today's stock price is the primary flag you wave in front of them, that's what they will deliver.
We all want to be fairly compensated for our work, but financial incentive is only one piece of what motivates employees to do a good job -- and research suggests it may be the least important of all.
Finally, ignore the bankers and avoid the earnings guidance game. Quarterly earnings forecasts have no place in a company that manages for the long haul. The guidance game distracts managers from the real work of creating high quality goods and services that are the hallmark of long-term value.
Instead of the ups and downs of the stock price, we need Zuckerberg and his team to stay laser-focused on what kinds of investments will keep Facebook competitive, productive and innovative both this decade and next. Courageous companies like Amazon, Unilever and Procter & Gamble have set an example; they are forward-looking -- they understand and establish guiding metrics around those things that will keep the company's long-term goals central to decision-making. Importantly, future oriented companies also build boards that insulate the executives from the stock gamblers and help them listen to the stakeholders and long-term investors who are most likely to identify critical business risks and opportunities that lie around the corner.
This is a big moment. Facebook and its peers have changed the way we communicate. I hope Zuckerberg and his team think deeply about the conditions for their long-term success -- so we may expect, and enjoy, the company's contributions to society over many years to come.
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