YES SIR

Facebook and Google succeed because they’re governed as “benevolent dictatorships”

Amid a series of tech industry earnings misses the last few quarters, Facebook proved to be a reliable bright spot, delivering solid growth and financials that consistently exceeded the estimates.

We’ll find out after the close of US markets today (July 27) whether Facebook has kept the string of good earnings news going. If so, it will only add to the goodwill the company has built up with Wall Street. And that goodwill is vital to Facebook management.

Winning the trust of shareholders not only keeps the share price afloat; it also makes it easier for management to roll out a big change without being questioned on it. For example, when CEO Mark Zuckerberg wanted to create a new class of non-voting shares—a move that keeps the company under his control even as he plans to donate 99% of his shares to a charitable foundation he created with his wife—investors overwhelmingly voted in favor of it.

And it’s when Facebook is making such bold decisions that it becomes abundantly clear that the company is taking a page straight from Google’s playbook to get what it wants.

Like Google, Facebook is a massive advertising company that does far more than advertising, and uses its core business to fund extraordinary experiments. Projects like connecting people who lack internet access can drag down a company’s financials in the near term, with only a glimmer of hope they’ll provide more opportunities for growth down the line. It may be that investors are patient or altruistic enough to support these kinds of efforts. But if they aren’t, they are powerless to do anything about it because of how these companies are governed.

The key lies in the share (read: power) structure. Even before investors approved Facebook’s new class C shares, the company had two classes of stock: class A, which carries one vote apiece, and class B, which has 10 times the voting power per share. This setup enabled Zuckerberg to control the company even with a minority stake. The multi-tiered share structure, becoming more commonplace among founder-led companies now, was made famous by Google. It went public in 2004 with two tiers of stock: class A shares, with one vote each, and class B shares, each with 10 votes. A decade later, the company created non-voting class C shares.

“The reason Facebook and Google are able to do what they do is because they are viewed as benevolent dictatorships,” says Aswath Damodaran, a professor at New York University’s Stern Business School. That’s not necessarily a bad thing—it’s preferable to a company run like a chaotic democracy, he notes—but “you’re going to have to accept the fact you have no control over the outcome.”

Like Google, Facebook also has gone through a period of growing up, cleaning house to focus on priorities as the company matures. For a time, it was churning out a number of experimental standalone apps, like its news reader Paper and the crowdsource video app Riff. But in December, the company shut down the Creative Labs division that produced many of these apps.

Facebook, of course, also owns some of the world’s most popular mobile apps, including Instagram, Messenger, and WhatsApp. With so many disparate parts, including internet-beaming drones and virtual-reality headsets, it’s conceivable that Facebook could further model itself after Alphabet, the parent company that was created when Google restructured last year, to break out the core search and advertising business from its other projects.

All fast-growing companies eventually come across the inevitable: a slowdown in growth. Analysts are still bullish both Facebook and Google, but it’s apparent they’ve transitioned from rapid acceleration to steady, blue-chip-like growth. Both have ambitious plans to counter the threat of deceleration by finding the next big thing. Just as when Google bet big on mobile with Android more than a decade ago, Facebook is hinging its future on Oculus and virtual reality, which it sees as the next major platform.

Read this next: Facebook has transformed into a platform of platforms

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