FACEBOOK

Corporate Governance and Compliance review

Forfatter: Christian Rindtoft

Afleveringsdato: 05-05-2020
Program: E-MBA 2020-2020
Copenhagen Business School
Course: Governance & Sustainability
Advisor: Steen Thomsen & Tom Kirchmaier
Facebook – the company

Company characteristics
Facebook is by far the largest Social Media company in the world. What started out as a social platform for
university students, has developed into a massive media corporation, covering most of the globe. Facebook
consists of more than 70 companies, ranging from very small IT start ops to the biggest IT solutions, for both
social and professional interaction, in the world.
Facebook has more than 2.5bn unique users and together with the acquisitions of both Instagram in 2012
(1.0bn users) and Whats App in 2014 (1.6bn users), some of the close-by competitors, Facebook continuous
to have the lead in the specific industry (appendix 1).
The true value of Facebook – lies in its ability to collect data from its users and use those data as a
commodity. As data is now considered to be one of the – if not the most – valuable resources on the planet,
Facebook is accumulating value with incredible speed. There are not many companies that know as much of
their end customers as Facebook, about their every day life, and Facebook is recording it all. Changed into a
commodity Facebook is using that same data of a person to sell back, the supplier becoming the customer.
The data collected is used as a commodity for direct marketing and as statistics for behavioral analysis.
As data is Facebooks real commodity, combined with an increasing public view of data as personally owned,
an investor should keep in mind, that data is also the single most risky part of Facebooks business, both in
regards competitive innovation, customer behavioral and outside regulations. More on these topics in the
issue section.
Facebooks biggest competitors by product is Google, Twitter and Snapchat. The Chinese variant WeChat is
partially a competitor on the Chinese market, where it is a much more integrated variant than Facebook,
making their product, and their financials not comparable to Facebook. Google on the other hand is using the
same information about individuals as a commodity, but the gatherings process is completely different. They
gather information’s differently, so the competition is centered around the direct marketing process.

Historic performance
Facebook was one of the first movers of grooming the data-mining business, and they have done well! The
growth rate in both sales and net profits are significant (appendix 3), and at the same time investments have
been increasing, protecting its lucrative market share.
The growth figures underline the potential in the data mining-and-selling industry, and Facebook is the
shining example. 98,5% of 2018 revenue came from advertising, which has a direct link to number of
profiles (appendix 5), and the main focus both now and in the future strategy (appendix 3).
Facebook has a strong cash flow, and is highly equity based, which together with a strong ownership, leaves
only minor room for shareholder influence. The strategy in recent years appears to be growing both organic
and via takeovers. Facebook relies very much on the implementation of AI in both its operations and in
future products hence bying smaller companies with promising tech inventions.
The stock price tells the same story. The financial value creation within Facebook, has tripled the stock value
within the last 5 years (appendix 7), which is far better than most of its leading competitors, and only
challenged by Google, Facebooks closest competitor (appendix 4).
Therefore, the continuous performance is very much dependent on people trusting Facebook, and the
restrictions and legislation that will influence the Facebook business model.

Key risks
The key risks of Facebook arise around data, both in regard to the gathering process and the selling process.
Their product is information on an individual level, the uttermost private parts of our everyday live,
commercialized and constantly used in new ways to gain profit. Particularly the last decade has shown the
public, how much power lies in both the information gathering business - ownership of knowledge - and in
the distribution business – by manipulating human behavior (Brexit, US election). Therefore, protection of
this personalized information has become a major issue, where governments gain momentum in defining
data as personal property and defining laws and regulations to restrict or minimize company and government
use of those data. Therefore, regulations and restrictions in the data gathering and distributing process is the
biggest challenge for Facebook, and most risks arise from that.
Less data: one of the biggest risks for Facebook, is losing their most valuable resource: data. It is critical for
Facebook sales, that they keep access to personal data, from as many people as possible, thereby being able
to increase value of direct marketing. Therefore, credibility and public thrust are key words. As mentioned,
98,5% of revenues come from advertising. The general perception among people is, that they have given up
in trying to protect their own data, which is obviously connected on several levels within the gathering-
industri. The GDPR and other regulations, tries to challenge the corporations, not on a individual data level,
but on a corporate process level. The last couple of years has numeric examples of Facebook being
challenged by US or European governments to ensure the integrity of the personal information. The question
in defining the size of this risk, is then: to which degree will Facebook be challenged in the future, by
national laws and regulations, and to what extent will Facebook prevail in the conflicts to come?
Leak of data: another major risk for Facebook, is leak personal data, entrusted by the individual, as a result
of a security or process breach. Hackers often test security systems of large companies, and in the data-
mining industry, there is no one greater than Facebook. This could also be the result of human error, by
inadequate controls or process mishandling. As can be seen in the stock value curve (appendix 4), that thrust
was breached in 2018, where personal data from 87m Facebook profiles were leaked to Cambridge Analytics
– which resulted in a decrease of nearly 50bn $ in a single month. It has been well defined by law and
regulations, that the ownership of personal information is personal and not corporate. People might accept
that Facebook and its competitors store their information, and they might to some extent accept the data
being used as directing marketing back at the individual, but the data should otherwise be protected against
theft or leaking to third party. Therefore, Facebook must always protect the data by all means, and should
always be able to answer which data they have on a personal level. The big question is therefore: Facebook
have high level cost regarding the safe keeping of the personal data, but is the data well enough protected? If
not, it could potentially have a great impact on the stock value and revenue level if many cases like the
Cambridge Analytical should arise in the future. With the revised GDPR regulations in place, fines could
potentially be as large as 4% of annual sales (appendix 6).
Habits and Technology: Facebook operates in a high-tech market, very much dependent on both
technological advancement and predictability of human preferences. It is imperative, that Facebook keep
investing in keeping the distance. History has shown that technology and product innovation has shortened
the life span of most companies, in particular tech companies, to as little as 10 years (appendix 14),
challenging corporations to reinvent themselves in an ever evolving market. If Facebook loses public
goodwill, or another product surfaces, it could undermine the core business of Facebook, hence forcing them
to reinvest in both public goodwill and technologies.
Governance and Compliance overview
Owner ship structure
Today Facebook is one of the most valuable companies in the world. It is listed on Nasdaq and owned by a
handful of large investors and many minor investors. Mark Zuckerberg, the CEO and founder of Facebook,
is by far the largest shareholder, both regarding value and voting power (appendix 2). The other large
shareholders, as mentioned in appendix 2, is very large investment companies, where Facebook is just a
small part of their portfolio. Although they represent ~22% of the listed value, as of April 2020, Marc
Zuckerberg holds ~57% of the voting power – that is, he has absolute control of the company.
It is also worth mentioning, that the investment time horizon could potentially be a problem, if Facebooks
financial results should weaken. Marc Zuckerberg, as a founder, and representing the voting majority, would
be expected to be in for the long run, whereas other main shareholders might have a shorter investment
horizon. These investors look at current performance and make their own assumptions in regard to Facebook
success of fending off their current challenges (as mentioned in both the Risk and the Challenge part of the
report).
Therefore, a minor, potential investor, must be aware that influence on company strategy will be minimal.
Marc Zuckerberg is still young, and there is no public indication of him planning to retire, or in any other
way lessen his influence. The strategy is pretty much his look at the future, and the board structure doesn’t
help the investors much.

Board structure
The board at Facebook consists of 11 people (appendix 12) with Marc Zuckerberg as chairman. The board
members are mostly positioned in other companies, not related to Facebook, therefore considered
independent.
The board consists of rather new members, as 4 of 11 has started in 2020 and 7 of 11 within two years.
Combined with the two that are from inside the organization – Marc and Sheryl – that could cause lack of
experienced board members to challenge management.
In regard to industry knowledge, other than Marc Zuckerberg, only two people have IT experience, Peggy
from Paypal and Andrew from Dropbox, and none of those has anything to do with social media platforms.
This could be a serious problem, especially now when Facebook are as exposed as they are. The future of the
company is at stake each day, and the battle has to be won. The major topics – some of them mentioned later
on in the report – that should be a part of the board meeting agendas, would be rather dysfunctional without
prober insight.

Comities
the board has established two separate committees to ensure focus on some of the key elements of the
company:
The Audit & Risk: on top of normal audit activities of financials in Facebook, the board has a very important
role, especially in regard to Facebooks situation. The committee ensures, that risks are prober identified,
assessed and mitigated. This function is crucial to Facebook, which faces risks around the globe each day,
some of them potentially deadly to the company. In the financial statement Facebook tries to monitor present
risks, but this is only the top of the iceberg. A company like Facebook could be destroyed by legal claims,
data exposure, competitor gains or changing of customer preferences. A search on claims and hearings in
regard to Facebook shows an unending list of candidates, and the list grow grows rapidly.
Facebook is a highly exposed company, profiting from knowledge of people’s everyday life details, hence
making it a subject of ongoing investigations and public regulations to ensure that misuse or leak of
information is not pending. These are all risks that are to be addressed properly, either by mitigating,
avoiding or accepting them. Risks in a global internet-based corporation, with the size of Facebook, should
have a very thorough and well-tuned risk process. The risk procedures descriped on Facebooks homepage
doesn’t evaluate the quality of the risk identification-assessment process, bud it must be assumed that
Facebook invest heavy in risk-mitigation and risk-avoiding programs to ensure management takes the right
decisions.
It is therefore crucial that board members understand these risks in depth and reacts to those not relying
solely on the organization taking the right actions. The industry knowledge and experience within Facebook
therefore can be crucial to understand the impacts and possible work arounds Facebook are facing. The lack
of industry knowledge in the board is transferred to this committee, as only one has experience from the IT
sector but none has industry knowledge.
The Nomination, Compensation & Governance committee also has some important functions on top of the
obvious, that is developing and recommending the Corporate Governance guidelines within Facebook. That
means, that this board is responsible for actively defining the structure and composition of the board, that is
the number of persons, the diversity etc. The composition of the board, and lack of knowledge and general
lack of experience within Facebook, will have to be part of review initiated by this board. It is worth
mentioning, that both historic knowledge of Facebook and industry knowledge is missing on the board.
Obviously, the many new board members don’t fit into the industry knowledge category, which could be a
future problem.
Facebooks has also established an Independent Oversight Board (appendix 13). The intention is that
Facebook will take a greater responsibility for data within Facebook, by ensuring the “right” level design of
Facebook policies, defining who and what should be allowed on Facebook, and hence the opposite. The
thought is, that fake accounts, non-neutral content (provocative, manipulative) and illegal activity, should be
expelled by a corporate definition of “right and wrong”.
In theory this is an effective approach, especially if heavier use of AI than today, could supplement the
processes. This could be just another attempt to solve a problem, where good intentions always come last. It
is obvious that something has to be done, and that Facebook will go a great distance to solve one of the most
urgent problems created in the big success Facebook has had, that is threatening to undermine the entire
platform. This is where Big Data and AI matches up perfectly. And a company like Facebook both have the
incentives and the muscle to attempt the “impossible”. Facebook must convince the public that battles
against crime and misuse is fought, and they must ensure, that at least some of them is won. The question is
if Facebook will succeed in moving from heal to toe in this regard, meaning that Facebook should
demonstrate to public, that the company is in charge. The board intentions addresses most of these problems,
but the success has yet to be seen.

Current challenges
Corona Crisis: The Corona crisis seems to have lesser impact on Facebook than anticipated. Advertising, the
main body of Facebook earnings, has decreased in several branches as, but the Ecommerce, internet-based
sales has at the same time increased significantly (appendix 15). Furthermore Facebook, as a tool of
connecting people, has strengthened its use during the crisis (appendix 9). As a result, the revised belief is,
that Corona crisis do not have that big impact on Facebook operation level, and hence only minor impact on
the economy in the longer run. The stock prices were decreasing dramatically as the Corona crises emerged,
but has since gained most of the losses by April (appendix 7)
Further growth: the question is how and to what extent Facebook can further grow their business. The high
stock price depends on further growth, whereas an investment in Facebook at current market prices will be
acknowledging a potential. If Facebook cannot diversify their core business it is questionable if
price/earnings will be to high. With new legislations restricting Facebooks distribution of data, Facebook
might have to look to other business areas.
Facebooks Libra project: Facebook has difficulties realizing the spoken potential of Libra, one of their new
visionary, tech-driven investments, that should drive the growth potential. The US government are intrigued
to what Libra could do to the established financial market (appendix 11), as well as the power Facebook
would have, having 2.4bn “bank customers”. The political pressure has taken the momentum of the Libra
project, with the most potent business partners PayPal, Visa, Mastercard and Ebay, all withdrawing their
participation (appendix 10), and now Libra looks only to be implemented as a fragment of the original plan,
if ever. It is most likely, that an enforced deployment of Libra could have severe restrains attached in form of
legislation and regulations, which will undermine its potential. If not implemented, it will probably have a
negative impact on Facebooks growth potential.
Election year: since the Cambridge-Analytica scandale, all focus is on the major data-miners and data-
influencers, especially when it comes to elections. It is said, that data was used to both influence the
American election where Trumph prevailed, as well as influencing the Brexit debate. As the American
election is approaching, it could potentially influence Facebooks reputation/performance.
Security: Facebook has one of the largest pools of data in the world, and are by law forced to protect it from
being hacked or misused. At the same time, they are a very influential media, which potential can influence
public opinions, like elections. Already Facebook are investing 5bn $ a year in security (appendix 8) and that
number will only increase with regulations and restrictions being implemented. The public voice agrees, that
the large media corporations, like Facebook, already are to influential and has to much power, whereas we
might expect, that regulations will increase, and thereby adding corporations like Facebook.
Data ethics: the last decade data-influence has been the center of discussions within and about large data-
mining companies as Facebook, Google, WeChat etc. Several of the lead players are forced into predictive
battles of rights, ownerships and responsibilities, due to the potential impact knowledge has on behavioral
patterns, decision makings and political stability. Facebook is struggling with ensuring public opinion, that
its ok that Facebook is armed with a weapon, it will never intently misuse that weapon. But history has
shown, that lack of controls and criminal exploitations often leads to severe misuse, no matter the intentions.
As technology development further strengthen the use of AI, robotics and face recognition, Facebook, as a
market leader in the industry, will have to take a stand in regard to the ethical borders of data exploitation.
Facebook has several times mentioned cross industry ethics board, that should ultimately set the standards of
future data governance. Google has created their own data ethics board, but the cross-industry debate often
ends up in struggles with countries different approach to data ethics and morale.
Conclusion
As a potential investor in Facebook, it is recommended facing the following main questions, before deciding
to invest.
1) Facebook is a financially well-established company, delivering great financial results. The potential
of Facebook is considered high, but the company faces a two-dimensional problem that could
enforce value destruction. The further growth of the Facebook means further exploiting the use and
depths of their main product: data of individuals. On the other hand, that is exactly why regulations,
restrictions and public hearings, has increasingly restraining impact on the company.
Do we believe that the benefits outweigh the disadvantages – meaning that Facebook will succeed in
creating future value growth?

2) If Facebook will stay in the lead, they will have to further exploit the business opportunities, as Libra
example, but that is also likely to expose Facebook – and question the owners – to negative media
responses. Also, future negative media coverage of data leaks/exploitations will happen.
Can we – as shareholders – stand up to criticism in a potential shitstorm?

3) The Governance structure within Facebook are not the most flexible and pro-tech agile, and that
could challenge the future growth potential of Facebook.
Do we believe that Facebook management know where they are going – and how?

The recommend investor should have a long ROI horizon, be relatively neutral to negative publicity and
thrust that the governance system in place have a plan and can handle the increasing risk level.
Appendix
Appendix 1) https://www.smartinsights.com/social-media-marketing/social-media-strategy/new-
global-social-media-research/

Appendix 2) Board member information – Facebook homepage

Top 5 shareholders share value (bn$) % of market value % of voting power
Role
Mark Zuckerberg 82 16% 57,90% CEO
Vanguard group Inc. 37 7% one of the world's largest investment management companies
BlackRock inc. 32 6% one of the world's leading asset and investment management firms
FMR LLC 26 5% one of the nation's largest financial services company
T.Rowe Price associates Inc. 22 4% an investment management company
Minorites 308 61%
Total 507 100%
source: selfcreated information from : https://www.investopedia.com/articles/insights/082216/top-9-shareholders-facebook-fb.asp
Appendix 3) Facebook homepage – annual report 2018

Appendix 4) yahoo finance, 5 years share price, expressed in % comparison closest competitors
Appendix 5) https://www.nasdaq.com/articles/what-facebooks-revenue-breakdown-2019-03-28-0
Appendix 6) https://gdpr.eu/the-gdpr-meets-its-first-challenge-facebook/

Appendix 7) Facebook homepage

Appendix 8) https://www.thestreet.com/investing/facebooks-3-biggest-challenges-in-2020
Appendix 9) https://www.bloomberg.com/quote/FB:US
Appendix 10) https://www.coindesk.com/ebay-stripe-follow-paypal-in-quitting-facebooks-libra-
project
Appendix 11) https://www.cnbc.com/2019/10/25/facebooks-libra-plans-appear-to-be-in-big-trouble-
heres-why.html
Appendix 12) https://investor.fb.com/corporate-governance/default.aspx

Appendix 13 https://about.fb.com/news/2020/01/facebooks-oversight-board/
Compensation,
Industri Audit & Risc Nom. &
Board since Board pos. knowledge commite Governance Current role
Mark Zuckerberg 2004 Chairman yes CEO Facebook
Sheryl Sandberg 2012 board yes COO Facebook
Peggy Alford 2019 board (no) x Executive Vice President, Global Sales of PayPal Holdings
Marc L. Andreessen 2008 board no x x General Partner of Andreessen Horowitz, a venture capital firm
Kenneth I. Chenault 2018 board no x Managing Director at General Catalyst, a venture capital firm
Andrew W. Houston 2020 board (no) x Chief Executive Officer and Chairman of the board of directors of Dropbox
Nancy Killefer 2020 board no Senior Partner at McKinsey & Company
Robert M. Kimmitt 2020 board no Senior International Counsel at Wilmer Cutler Pickering Hale, an international law firm
Peter A. Thiel 2005 board no c President of Thiel Capital, an investment firm
Tracey T. Travis 2020 board no x Executive Vice President and Chief Financial Officer of The Estee Lauder Companies
Jeffrey D. Zients 2018 board no c CEO of the Cranemere Group Limited, a diversified holding company

Appendix 14: https://innovation360.com/average-company-lifespan-has-shrunk-to-10-years-dont-

be-average/
Appendix 15: https://www.roirevolution.com/blog/2020/04/coronavirus-and-ecommerce/