Outline and Summarize of the Article

Discuss about the Corporate Governance and Accounting Scandals.

Nils Pratley on Finance 2018 article highlights that the World’s eighth largest company needs governance structure to provide better oversight than its founder. In his article, Nils Pratley focuses on Facebook board and explains why the board has to think and act past Mark Zuckerberg’s primary ideas for financial reforms efficiency (Pratley, 2018). Nils highlights the uncertainty surrounding Facebook’s future management. There is a doubt whether Facebook’s board has been discussing Mark Zuckerberg stepping down as chairman and leaving him as chief executive since Mr. Zuckerberg affirmed he is unaware of such as discussion.

On Wednesday 4^th April 2018, Mark Zuckerberg revealed that he was not aware of any discussions about his succession as the chairman. However, Nils states that it could probably remain safe to assume that Zuckerberg was aware of such discussions from his fellow directors. There have been calls for the appointment of an independent chair at Facebook, for instance from NY City’s pension scheme which are always ignored (Pratley, 2018). Personal data and information security are threatened due to Zuckerberg’s big blunders when handing FB users information.

In Nils’s article, the board is seen to have acknowledged Zuckerberg’s bizarre loose version of accountability. Recently, Mr. Zuckerberg committed a huge mistake of allowing private data of 87 million Facebook users to get “inappropriately shared” with Cambridge Analytics (Pratley, 2018). This was a great mistake that subverted his accountability as the board chairman. Abuse of users’ data must be brought to a halt.

The fact that Zuckerberg is running the world’s 8^th largest company does not allow the board to ignore such mistakes and keep watching. Notably, $50 billion has been removed from Facebook’s stock market value in financial scandals leave alone personal privacy concerns and the influence of social media on democracy, and this provokes a regulatory backlash (Pratley, 2018).

Given these circumstances, the board feels there is no right corporate structure and this is driven by stakeholders interest. Nils states that the board must ensure that the company is not run at the whim of a chief executive who is plainly a technological whizz but accepts he failed in grasping FB’s responsibilities since users numbers rose to 2 billion (Pratley, 2018). Again, users, politicians, and advertisers demand a reassurance that the boardroom of FB undertakes basic checks and balances.

The article further explains the lack of corporate governance reforms at Facebook given Zuckerberg’s stranglehold over the company’s voting shares. The executive chair commands 60 percent voting shares and has a 16 percent economic interest in the company (Pratley, 2018). Practically, shifting these roles from him is impossible. Nils advice Scott Stringer (the NY City Comptroller) who has invested $1 billion pension fund in FB to keep pushing for the changes.

Discuss the corporate governance issues raised using corporate governance theories to illustrate the importance of these issues

Stringer believes that Facebook must pursue a “reputation-enhancing second chapter” by appointing an independent chair, establishing an independent board committee, and hiring three external directors who are well versed than Zuckerberg in data and ethics complexities so as to enhance oversight role for data privacy policies and risks (Pratley, 2018). Next week, the US congregational committee will question Zuckerberg on the governance issue.

According to Nils Pratley on Finance article, Mark Zuckerberg owns 16 percent of the company and controls 60 percent of voting power. There are various corporate governance issues raised in this article about Facebook which will be discussed in close reference to corporate governance theories as below.

 Facebook’s ownership structure scares investors. There is no clear roles and responsibilities definition of the board of directors in relation to oversight roles. The executive chair, Mr. Zuckerberg is control behavior and handling of customers’ private data is questionable. From the article, Zuckerberg is seen to have allowed data for 87 million Facebook users be shared with Cambridge Analytics inappropriately (Vernimmen et al., 2014, p. 50). Such a huge mistake is not allowed in such a big company. However, due to poor governance structure in the company, he cannot be removed as the executive chair of the company since he controls over 60 percent voting power of the company. Stakeholder theory explains how this poor ownership structure at Facebook affects the companies’ interested groups such as employees, customers, and potential investors (Holly & Sidley, 2014, p. 8). There is not board independence in the company and this is risking customers’ data privacy. The fear by investors to invest in FB has contributed to the company’s removal of $50 billion from its stock market value due to financial scandals.  Potential investors of the company are running away from the company due to these mistakes. Zuckerberg is not an independent executive chair and needs to vacate his role. Other board members have been discussing how Zuckerberg can get replaced from his position so that their independence and ideas are not compromised (Wan & Idris, 2012, p. 10). The users of Facebook have been complaining about their private data insecurity that originates from the top management, in particular, Zuckerberg. Improving the image and reputation of Facebook requires the management to properly apply stakeholder theory principles by upholding interested parties demands, needs, services, and privacy. Restructuring its management structure will lead to the recovery of the $50 billion loss in stock market value as well as safeguarding stakeholders information. Important to note, there is no outside director who oversees the operations of internal directors (William, 2002, p. 41). The board chair is not independent, as a result, the decision-making process is manipulated to suit personal interests. Also, the agency-principle relationship theory may help the company in establishing a board that is inclusive of both principle and agent needs. The bad board composition is exposing Facebook to ultimate failure when it comes to respecting clientele data and efficient management of finances in the capital market. The operations and decisions of the board are affecting the outsiders’ perception of the company, and this is damaging Facebook’s reputation to members of the public who are its stakeholders. The proper application of stakeholder theory would require the board to come up board structure that takes into interest the stakeholders needs and demands.

The ownership structure (Board Composition)

Facebook is entirely run at the whim of an executive chair who is totally a technological whizz but poor in managerial skills. Mr. Zuckerberg has been unable to manage Facebook since the time its users rose to 2 billion. He says life involves continuous mistakes that make people learn the best strategies for moving forward. Stewardship theory explains this corporate governance issue (Van den Berghe, 2012, p. 77). According to stewardship theory, the requirements of interested parties must be put forth and satisfied in a dynamic manner that creates equilibrium for balanced governance. However, there is self-interest at Facebook by the executive chair and this makes him feel that he has the monopoly right to use stakeholders’ data and information the manner he wants provided he reaps some benefits on the same (Wan & Idris, 2012, p. 20). It is unethical how Zuckerberg heads IT oversight and innovation whilst he lacks skills of handling users’ data and ethics complexities (Zuckerberg, Sittig, and Marlette, 2011, p. 4). Enhancing IT oversight and innovation requires the management to apply stewardship corporate governance theory to create an independent board of committee with oversight of private data security and risks. Being the world’s 8^th largest company, the board should not sleep and watch Mr. Zuckerberg subverting the company’s reputation to the customers through his weird actions of sharing customers’ data without their consent to analytics firms (Holly & Sidley, 2014, p. 14). Committing mistakes while running such confidential users data is highly risky of the company, and should not be encouraged. Abuse of data is a crime and cannot be treated like a student making a mistake in a mock exam, to Facebook it exposes the company to severe impacts that raise deep questions about safeguarding personal privacy initiatives by the company. In this perspective, stewardship theory will help the management facilitate and empower rather than monitor and control the executive board’s behavior on user’s privy data (William, 2002, p. 66). Further, agency-principle theory comes into the application as far as IT oversight role is concerned. There is a conflict of interest between the board chair and 87 million people whose information is shared with Cambridge Analytica without their consent. The application of both stewardship and agency theory will help in guiding Facebook in the creating of an independent board committee with oversight of data privacy policies and risks.

The application of America’s Sarbanes-Oxley Act does not promote good corporate governance and protection of shareholders’ interests at Facebook. The Board committee of Facebook operates in a code of conduct that is unseeingly interested in safeguarding stakeholders’ interests. The lack of board independence at Facebook is making stakeholders raise concerns about the appointment of an independent board chair other than Zuckerberg who is the owner of the company (Claessens, 2006, p. 30). Agency theory explains the conflict of interest between the management of Facebook and the stakeholders, for instance, the New York Pension Find. Agency theory emphasizes the importance of proper relationships between companies to its interested parties. However, Zuckerberg is led by self-interest and that is why he chairs the board and misuses customers’ data to for self-benefit. Regulatory backlashes at Facebook arise due to lack of democracy in the Board for Mr. Zuckerberg has the power to manipulate every decision made by the board for he commands 60 percent of voting shares (over 50 % of the needed quorum). There is a conflict of interest between the company and outsides such as users, advertisers, and politicians since Facebook has failed to meet their expectations of balanced checks and equity in the boardroom. Zuckerberg’s lack of interest in reforming Facebook’s governance is against the principles of agency theory relationship and must be revisited (Kock et al., 2012, p. 500). There is need of Board independence at Facebook and this requires the Board to use other methods other than voting to bring about change management (Dicks, 2012, p. 2000). Further, the existing conflict of interest between the board of management and investors, for instance, Stringer must be addressed in order to respect the principles laid down by agency theory. Facebook needs to create an independent board committee with proper oversight that can act objectively in vetting Zuckerberg and confidentially replace his chairmanship position in his company.

IT Oversight and Innovation

In Nils Pratley’s article about Facebook, he calls upon the board to think beyond just Mark Zuckerberg to bring about reforms in the company. Financially, the company is at risk since its main investors are getting discouraged by the recent decisions and mistakes by Zuckerberg (Carter, Simkins, and Simpson, 2003, p. 50). Agency theory explains this conflict of interest between Facebook and its investors especially Mr. Scott Stringer who oversees a pension fund worth $1 billion on Facebook. The recent audit report shows that approximately $50 billion was removed from Facebook’s stock market value, and this is a major risk to the company financially (Agrawal and Chadha, 2005, p. 400). The lack of board objectivity, led by Zuckerberg creates a chance through which he the executive chair cannot be removed from the position despite his constant and huge mistakes (Brammer, Jackson, and Matten, 2012, p. 28). Other instances of Zuckerberg’s mistakes are the one when he inappropriately shared out customers private data to Cambridge Analytica. The board is formed by competent members whose diverse knowledge is sunk by the IT expert Mr. Zuckerberg. However, the executive chair is incompetent when it comes to the ethics and principles of quality management for he is guided by self-interest objectives. The board is composed of internal directors whose behavior does not depict the level of governance in such a large corporation. One of the investors states that the reputation of Facebook is at stake and that it can only be boosted through a modest proposal of recruiting three outside directors who are better versed with management skills that Zuckerberg. Facebook needs competent directors who can handle the complexities of data and ethics witnessed in the industry through which FB operates (Bonsón, Royo, and Ratkai, 2015, p. 88). Also, stakeholder theory effectively helps in explaining the importance of management competence and objectivity. Driven by objectivity, the board will address the needs of all interested groups to the company. Further, the application of agency theory concepts will help in protecting shareholder interests, minimizing agency relationship costs, and ensuring a proper alignment of the agent-principal relationship at Facebook.

In the article “Facebook board has to look past Mark Zuckerberg for reform” Nils Pratley raises various issues of importance to the company and the general public at large. These issues of importance include:

Data privacy: Data privacy is an issue of importance to the general public who largely spend most of their time using Facebook. Sharing confidential users’ information without their consent is a crime (Tricker, and Tricker, 2015, p. 88). Facebook needs to enhance its ethical behavior when handling peoples’ data. The number of Facebook users’ has been frequently growing and this calls for the advancement of data privacy policies and oversight roles by the company (Bednar, 2012, p 1). There is no person who is happy to see his/her private data maliciously used in fraud activities such as 2016’s election ringing in the US. Further, such instances of inappropriately sharing people’s data with research firms by Facebook have to end.

Facebook’s governance structure: The issue of Facebook governance is an area of interest to the board. The board feels that there is no independence of the board since the executive chairman has a self-interest in his company. The desire to bring board independence and objectivity in the company’s governance structure has been prompting the board members to discuss Zuckerberg’s possibility of stepping down as chairman (Benn and Dunphy, 2013, p. 60). The board wants to establish a governance structure in which board committee independence is not compromised by the current chairman who lacks objectivity and managerial skills when it comes to handling private data and controlling financial disparities in the stock market.

The company needs to modest its public image: According to Stringer, Facebook has lost its reputation from investors and needs to adjust its management structure to win back its reputation. The best way of advancing its reputation is by appointing an independent chair of the board, recruiting at least three better versed outside directors other than Zuckerberg, and establishing an independent board committee who will play an oversight role on data privacy security. Also, the company must enhance the security of finances listed in the stock market value in order to maintain and increase the number of investors within its financial listings (Blowfield and Murray, 2014, p. 66). Also, the price of shares in the stock market has been increasing for Facebook in comparison to its rivals, and the board needs to ensure that the share prices are favorable and affordable to the shareholders.

Respect for media and investors: Facebook has been issuing legal threats to reporters when they report on the uses of people’s data in political campaigns. The behavior of threatening the media by Facebook’s management has increasingly become a subject of discussion recently (Padgett, 2011. p. 6). The media is a stakeholder and a beneficiary of Facebook services and thus need to be respected. Facebook needs to respect all its stakeholders just as stipulated under stakeholder theory. The board of Facebook does not keep investors’ demands and this is affecting it in the stock market. Investors have been pushing for changes in the board composition and structure (Bebchuk and Weisbach, 2010, p. 950). However, due to Zuckerberg’s stranglehold control over voting shares, this remains impossible. To continue winning more investors, Facebook must listen to investors’ concerns and consider them in decision making.

Conclusion

In the context of Facebook’s article, the principles of corporate governance are independence, integrity, transparency, accountability, and composition. The article reveals that Facebook’s management structure and composition has to be reformed, particularly its composition and independence. Lack of board’s independence is the genesis of corporate governance issues at Facebook. Facebook has the worst corporate governance structure that is headed by Zuckerberg, the company’s main director. All decisions made by the board are manipulated by the chair and always suit own interests other than addressing stakeholders’ needs. It is unethical of Zuckerberg to control 60 percent of the company’s voting rights and using this opportunity to manipulate the board committee to accept what suits him. The stakeholder theory is against such selfish behavior and thus the chair must act ethically by even resigning the post of board chairmanship to bring about independence in the panel. Further, the IT oversight role is subverted by vesting it on the executive chairman who uses peoples’ private data for selfish gains without their consent. Users information security needs to get safeguarded by the company and this calls upon the board members to use other means other than voting power to ensure Zuckerberg vacates this position. Awarding the IT oversight role to an independent person will help the company enhance good corporate governance. As a result, the conflict of interest between Zuckerberg and the board and other stakeholders will be addressed appropriately. Board competence and objectivity have also been thwarted as per the article. Appointment of other external board members who are more competent and guided by objectivity principle as compared to Zuckerberg needs to be undertaken. Further, lack of independence in the board composition has been encouraging seamless behavior by the board committee. As a result, investors’ capital in the stock exchange market has been losing value hence discouraging investors from investing in the company. Resolving corporate governance issues at Facebook requires proper reference and application of corporate governance theories such as agency theory, stakeholder theory, stewardship theory and others. The application of agency theory will help the board develop strategies and policies that maximize shareholders wealth within the company and also safeguard users confidential data and information. The proper application of stakeholder theory will enable the board committee value stakeholders needs and address their demands appropriately hence maximize profit making for the company. Finally, Facebook needs to establish a corporate governance structure that can provide better oversight than what its founder; Zuckerberg created.

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Appendices for the article

“Facebook board has to look past Mark Zuckerberg for reform”

Nils Pratley

Thursday 5^th April 2018

https://www.theguardian.com/technology/nils-pratley-on-finance/2018/apr/05/facebook-board-has-to-look-past-mark-zuckerberg-for-reform