® Thought Leadership in Governance since 1976 Third Quarter 2018 @DirectorsBoards directorsandboards.com Facebook’s Board is “RIDING Can they tame ” bottom-line risks A TIGER ALSO! and preserve Director Development: The perpetual student Care & feeding of an effective board democracy? Rethinking director onboarding BOARD OVERSIGHT Facebook’s Board is “RIDING A TIGER” 18 DIRECTORS & BOARDS BOARD OVERSIGHT Directors at the embattled social networking giant face risk-scrutiny as they try to balance shareholder value and societal good. By Eve Tahmincioglu and Allan Grafman ith the U.S. elections loom- Some critics say Facebook’s dual-class stock ing, all eyes are on Facebook structure giving Zuckerberg majority-voting CEO and chairman Mark rights undermines the board’s effectiveness. Zuckerberg and whether he Facebook officials counter the company has has done enough to ensure bolstered corporate governance and is on the Wthat nefarious sources with fake accounts on the right path. social networking site don’t derail democracy. Facebook’s directors face immense chal- But all eyes should also be on Facebook’s lenges, because “They’re right at the heart of board of directors, which according to the so many changes in society,” says Ric Mar- firm’s own corporate governance guidelines, shall, executive director in the environmental, “acts as the management team’s adviser and social, governance (ESG) research team at in- monitors management’s performance.” vestment research firm MSCI Inc. Good corporate governance at a corpora- “They’re riding a tiger, but they’re holding tion has never been as critical as in the case of on,” he says about the board. Facebook, which allowed 50 million Facebook Facebook, he continues, “is still facing enor- profiles to be harvested by data analytics firm mous risk, primarily in data privacy.” The risk, Cambridge Analytica and allowed fake accounts he adds, isn’t just the potential for more scan- from foreign entities to proliferate on the plat- dals; it’s also the potential for serious pushback form, many part of an effort to influence voters. from governments. “It’s entirely possible that if And in late September, Facebook announced the board doesn’t manage those risks they will yet another hacker breach, with an additional 50 end up facing regulations that put the entire million customer accounts compromised. business model at risk.” Has the board done enough given indications Indeed, a few state attorneys general are re- the November elections could still be impacted portedly mulling possible regulations on Face- by Facebook’s bogus accounts? Is the compa- book and other social media companies, and ny’s bottom line going to take a hit largely last month, the U.S. Justice Department an- because of management’s security missteps? nounced Attorney General Jeff Sessions “con- Even bigger questions: What exactly is vened a meeting with a number of state attor- “enough” when it comes to corporate gover- neys general … to discuss a growing concern nance in this unprecedented scenario? Does that these companies may be hurting competi- the board even have the power to impact real tion and intentionally stifling the free exchange change given that Zuckerberg has a majority of ideas on their platforms.” vote and holds the position of chairman of What’s happening at Facebook goes to the the board? heart of the challenges directors deal with THIRD QUARTER 2018 19 BOARD OVERSIGHT when it comes to risk oversight, and the need Facebook sees its shortfalls as a function to sometimes put shareholder value second of the Herculean task at hand. “Security is in order to protect the company and its role not something that you ever fully solve,” said in society. And also there’s the question of Zuckerberg during a press call in August. “Our whether a board has the power to make these adversaries are sophisticated and well-funded, tough choices when the company CEO and and we have to constantly keep improving to founder is also the board leader. stay ahead. But the shift we’ve made from re- Nora Chan, a Facebook spokeswoman, active to proactive detection is a big change told Directors & Boards that changes have been — and it’s going to make Facebook safer for implemented to bolster the board’s oversight everyone over time.” and to root out fake accounts that impacted “Over time” is apparently not in time for previous elections. the upcoming elections. There are, however, indications the fixes Facebook’s former chief security officer, may be too late for the November elections. Alex Stamos, who left the firm in August, said This despite the company’s investments in it may be too late to protect the integrity of security upgrades, which Zuckerberg has the upcoming elections. already said: “will significantly impact our In an August post he wrote for the Law- profitability.” fare blog he blamed a host of factors for the FACEBOOK’S BOARD OF DIRECTORS Marc Andreessen Erskine B. Bowles Kenneth I. Chenault MARK ZUCKERBERG Member of the Audit & Chair of the Audit & Risk Member of the Audit & Facebook Founder, Risk Oversight Committee Oversight Committee Risk Oversight Committee Chairman and Chief Director since 2008 Director since 2011 Director since Executive Officer Andreessen is a Bowles is President February 2018 co-founder and has been Emeritus of the University Chenault is Chairman a General Partner of of North Carolina and and a Managing Director Andreessen Horowitz, a served as President from at General Catalyst, a venture capital firm, since January 2006 through venture capital firm. July 2009. Andreessen December 2010. Bowles Prior to joining General co-founded and served as served as White House Catalyst, Chenault was the Chairman of the board Chief of Staff from 1996 Chairman and Chief of directors of Opsware, to 1998 and Deputy White Executive Officer of Inc. (formerly known House Chief of Staff from American Express as Loudcloud Inc.), and 1994 to 1995. Company, a position he SHERYL SANDBERG he was a co-founder of held from 2001 to 2018. Facebook Chief Operating Netscape Communications Officer Corporation. 20 DIRECTORS & BOARDS BOARD OVERSIGHT ongoing issues, including “the fundamental on the election process, and recent steps were flaws in the collective American reaction.” taken to boost board independence. But as Others point the finger at the Facebook for whether the board did their jobs when it boardroom. comes to election integrity, Facebook’s Chan “It is a deficiency in governance and declined comment or to provide comment board oversight,” maintains Julie Goodridge, from any of the company’s board members. CEO, NorthStar Asset Management, which Some believe Facebook’s board, the ma- holds $5.5 million worth of Facebook stock. jority of which were around before the data “What’s going on at Facebook and what’s breaches occurred, is as much responsible for about to go on at Facebook is because the the missteps as management. board didn’t do their homework around risk.” Lawsuits have already been filed against the Assessing and managing risk, adds MSCI’s company’s leadership, including the board, as Marshall, is the most critical contribution the a result of the breach, including one repre- board can make. “We look to the board for senting shareholders. The suit, filed in March oversight, to create a balance between the by Cotchett, Pitre & McCarthy the Northern creative enthusiasm of the CEO and risk District of California, San Francisco Division, oversight.” singles out six board members: Marc An- dreessen, Peter Thiel, Reed Hastings, Erskine Facebook’s governance steps Bowles, Susan Desmond-Hellman and Jan The company has announced a host of mea- Koum, WhatsApp CEO who stepped down sures to mitigate the impact of fake accounts from the board earlier this year. Susan Desmond- Reed Hastings Peter A. Thiel Jeffrey Zients Hellmann Chair of the Member of the Member of the Audit & Lead Independent Compensation & Compensation & Risk Oversight Committee Director; Member of Governance Committee Governance Committee Director since May 2018 the Compensation & Director since 2011 Director since 2005 Mr. Zients currently Governance Committee Hastings has served Thiel has served as serves as the CEO of the Director since 2013 as the Chief Executive President of Thiel Capital, Cranemere Group Limited, Desmond-Hellmann is the Officer and Chairman of an investment firm, since a diversified holding Chief Executive Officer the board of directors of 2011 and a Partner of company. Mr. Zients of The Gates Foundation. Netflix, Inc., a provider of Founders Fund, a venture served in the Obama Desmond-Hellmann an Internet subscription capital firm, since 2005. Administration from 2009 served as President of service for movies and In 1998, Thiel co-founded to 2017, including as Product Development television shows, since PayPal, Inc., an online Director of the National at Genentech, where 1999. Prior to Netflix, payment company, Economic Council for she was responsible for Hastings served as where he served as President Obama and pre-clinical and clinical Chief Executive Officer Chief Executive Officer, Acting Director of the development, business of Technology Network, President and Chairman of Office of Management development, and product a political service its board of directors from and Budget. portfolio management. She organization for the 2000 until its acquisition by joined Genentech in 1995. technology industry. eBay in 2002. THIRD QUARTER 2018 21 BOARD OVERSIGHT That suit states that “the com- WHATSAPP WITH pany’s executive management and FACEBOOK & PRIVACY? board of directors consistently mis- represented to users and sharehold- an Koum, the cofounder of the in Facebook’s boardroom. Facebook’s ers that it had a comprehensive popular messaging service spokeswomen would not comment on privacy program in place, that it JWhatsApp that Facebook bought whether he did. notified users if their information in 2014 for about $20 billion, got a seat Active disputes over company policy had been compromised, and that on Facebook’s board following the pur- are common, says Charles Whitehead, it required third-party developers chase.