Zuckerberg's mistake?

It's easy for a commentator, writing from a distance, to frame such a headline, and to claim greater wisdom than a person whose business acumen has led to the creation of one of the internet phenomena of our time. Facebook remains one of the hottest stocks in the world. In 2017 it generated $16 billion in net income, on almost $40 billion of revenue. Zuckerberg has a personal fortune of some $65 billion.

Yet, from a governance perspective, what happened this week on Capitol Hill was a bit of a car crash for the social network and Zuckerberg, one of its co-founders. If the unease on his face painted a thousand words, it's what he actually said which provided the most significant insight into the way the company is run.

Let's remind ourselves of the way in which Facebook is structured. The company previously had two classes of stock - Class A and Class B - created when Facebook went public, to ensure Zuckerberg retained total control. The Class A shares have one vote each, and Zuckerberg owns a small percentage of them; the Class B shares have 10 votes each, and he owns 85% of them. Overall, Zuckerberg owns 16% of the company, but wields 60% of the votes (the figures vary). In 2016, Zuckerberg proposed, and investors accepted (some, reluctantly), a new share class structure - involving the addition of non-voting Class C shares, ie with no voting rights for their owners. Zuckerberg received a large number of these C shares, and these will be sold off eventually by Zuckerberg and his wife Priscilla, to fulfil their ambition to give away 99% of their wealth in their lifetime.

Critically, Zuckerberg retains control of the board, the voting shares and the company. As Fortune contributor Geoff Colvin commented at the time of the introduction of the revised share structure in 2016, “The argument in favour of Facebook’s governance setup is the same argument made in favour of benevolent dictators.” While times are good, noted Colvin, the share structure need not matter. When times are bad, such unusual share structures cause problems. This is at least partly because it is the board's job to ensure that the company has the right CEO and, if it decides that that is not the case, to find a new one. The problem with a multiple-class company like Facebook is that Zuckerberg can fire the board, rather than the other way round. In the current crisis, the only way Zuckerberg will leave the company will be if he decides to resign. Which makes Senators' questions about whether Zuckerberg is still the right person to run Facebook, a question for Zuckerberg, rather than the board, to decide.

I have worked with many boards where there has been a majority shareholder, and the important dynamics of accountability and strong, creative challenge are often absent. It is difficult imagining any conversation in such a boardroom which isn't regularly confronted by the commercial reality that, at the end of the day, what the majority shareholder wants, the majority shareholder gets. It is therefore difficult to resist the thought that the problems besetting Facebook are, to some degree, problems caused by poor governance which, at least in part, is symbolised by a board in name only. No-one made that point better than Zuckerberg himself when he told Senators on Wednesday:

“But it’s clear now that we didn’t do enough to prevent these tools from being used for harm as well, and that goes for fake news, foreign interference in elections and hate speech, as well as developers and data privacy. We didn’t take a broad enough view of our responsibility, and that was a big mistake, and it was my mistake, and I’m sorry. I started Facebook, I run it, and I'm responsible for what happens here.”

As for not taking 'a broad enough view of our responsibility', one of the key governance obligations of a board is to consider the company's purpose - the reason for the company's existence - and then to work that through to consider the company's positioning (think brand and reputation, just for starters). Is the company correctly positioned with its stakeholders, including its shareholders, given what the company was created to achieve?

It is clear, by Zuckerberg's own admission, that those issues were not properly thought through. Indeed, did the discussion happen at all? A lot of important discussions don't happen, or don't happen in a truly meaningful way, in boards with a majority shareholder.

So as Zuckerberg returns to Facebook HQ and reflects on whether he took sufficient heed of the warnings which had become increasingly prominent over the last few years about the company's positioning, and as he considers how close he might have, and still might, come to having to change the business model to ease the pressure from Capitol Hill, he may also ponder the judgements he and the board made, or didn't make, on the balance between the company's purpose and its positioning, and any decisions he subsequently took, or did nor take.

Because, surely, he would have played the game differently. Because, to be specific, as a result of the difficulties in which Facebook now finds itself, the company's share price has fallen from about $185 at the time the Cambridge Analytica crisis hit, to about $165 at the time of writing this blog. Because that deterioration in share price, caused not least by the threat of lawsuits as well as regulation, has resulted in a fall in the market cap of Facebook of about $80 billion, close to the total market value of companies like Paypal ($91 billion) and Starbucks ($81 billion).

As Richard Waters so beautifully put it in the FT on 23 March 2018, when talking about the companies that dominate the consumer internet economy, "It is hard to claim the moral high ground when you are stumbling around in an ethical fog". How much time did the board spend thinking about the ethical fog swirling around Facebook? And since, given its ownership structure, the board is essentially Zuckerberg, was failing to find a path through that ethical fog essentially Zuckerberg's mistake?