United States: Facebook Shows No Man Is An Island When It Comes To Governance

Last Updated: September 12 2018
Article by Kirsty-Anne Jasper

Following Facebook's stock-market plunge, questions should be asked of its governance practices

On the morning of 26 July, Facebook was valued at $630 billion (£481 billion). By the end of the day, its value had dropped to $510 billion (£389 billion), a 19% drop and one of the biggest one-day losses in US corporate history. It is the largest drop since September 2000, when Intel dropped $91 billion, and at $120 billion is nearly the same as the entire value of McDonald's on the New York Stock Exchange ($122 billion).

Mark Zuckerberg, the company founder saw his personal worth drop by nearly $15 billion and moved him from fourth to sixth on Forbes' list of global billionaires.

The share price plummet came off the back of Facebook's reporting on its second quarter earnings. Although the figures were still positive, they came in below investor expectations and Facebook lowered its outlook on revenue and raised its forecast for expenses.

Tough times

It has undoubtedly been a difficult year for Facebook. The Cambridge Analytica scandal, where the analytics firm gained access to the data of 87 million users, generated numerous negative headlines and a £500,000 fine from the Information Commissioner's Office. Mark Zuckerberg himself appeared in front of the US Senate to address these issues, as well as allegations that Facebook had failed to prevent Russia-linked adverts, designed to influence the 2016 US presidential election, from running.

These scandals may have contributed to the reduction in earnings and the number of European users, which dropped by three million in the first quarter, and a lack of growth in the US market where user numbers have stayed flat. Possibly, the difference in the markets is partially

due to the introduction of the EU's General Data Protection Regulation (GDPR) in May, although Facebook's chief operating officer Sheryl Sandberg said on a call with analysts that 'GDPR has not had a significant [advertising] revenue impact, but we also recognize it was not fully rolled out this quarter'.

The role of the board

"Attitude to corporate governance is poentially key to a successful future"

Any unprecedented loss or failure to hit predicted growth must of course be analysed as a cause for concern, but there are other issues for Facebook, with questions surrounding the makeup of the board and their attitude to corporate governance poentially key to a successful future.

The Cambridge Analytica debacle is also at its core a governance issue. One of the key aspects of Facebook's business model is acting as a data broker, collating personal details in order to more effectively target advertising. If data is the primary asset of the company then it is imperative that governance is robust enough to protect it.

The role of the board in ensuring future growth and protection of data is important. But the Facebook board – comprised of nine individuals, including seven non-executives – has arguably been conspicuous in its absence in the majority of discourse surrounding Facebook's recent issues.

Indeed, Mark Zuckerberg has been central to the company in all respects, but the company needs to expand from its reliance on one man and allow the board a bigger role in order to protect itself.

Benevolent dictator

Zuckerberg's combined role of chairman and chief executive, although not unusual in the US, would likely be strongly opposed on this side of the Atlantic; the Facebook board have faced repeated calls to consider appointing an independent chair, including from major investors.

Scott Stringer, the New York City comptroller who oversees a pension fund that has $1 billion invested in Facebook has issued proposals for Facebook to enter a 'reputation-enhancing second chapter', which include appointing an independent chair, recruiting three outside directors who are more experienced than Zuckerberg in the complexities of data and ethics, and creating an independent board committee with oversight of data privacy policies and risks.

Zuckerberg accepted personal blame for the data issues when addressing the Senate, but beyond promises that arguably amount to 'we will do better' there have, so far, been few announcements on improving governance. The board's acceptance of this may seem unusual until we take into account the stronghold that Zuckerberg has over Facebook's voting shares. He has 60% of voting rights, despite only possessing 16% of economic interest. This means that practically speaking, he is near impossible to overrule.

George Dallas, policy director for ICGN, states: 'The governance needs of a company can evolve over its life cycle and this is something that the Facebook board must not forget. Are the skills that helped Zuckerberg to create and build Facebook the same as those the company now requires as it matures?

'Mark Zuckerberg may be regarded by the board now as a worthy leader and benevolent dictator; however benevolence is not necessarily a permanent condition.

As the company evolves the board may wish to consider stronger checks and balances on executive power and review the potential for introducing a sunset provision in the existing dual class arrangement. But does the current board have the true independence to consider the challenges to Zuckerberg's power?'

"Facebook needs to expand from its reliance on one man and allow the board a bigger role"

Additionally, this is a 'shareholder-only' company: according to its latest 10-k form, equity consists of almost 90% of the balance sheet. This may not be unusual but does mean that there are few bond holders or bank creditors to exert external influence on the company, increasing the power of the founder.

Peter Swabey, policy and research director at ICSA: The Governance Institute, comments that 'dual-voting rights is an issue that attracts strongly-held views, both for and against. For some, the principle of one-share, one-vote is sacrosanct and any entrenchment of management against the interests of shareholders.

'For others, it creates an investment vehicle where the investment is in the work of the founder who should be untrammelled by the concerns of investors. Dual voting rights entrench the founder, but that can be a good thing, because you are investing in the founder. In a sense, it could be described as a conflict between the view of the shareholder as owner of the company and the shareholder as merely an investor in the company.

'My opinion is that either is fine, provided that the situation is clearly understood by the investor and that restricted voting shares are not included in an investable index so that investors have a meaningful choice as to whether to buy them or not.'

Challenge from shareholders

Facebook's share sistuation may be challenged in the near future, as a Delaware Chancery Court Vice Chancellor J. Travis Laster has called upon Zuckerberg to explain in open court why last year Facebook announced a plan to issue a special class of non-voting stock to accommodate its founder-CEO, retaining voting control of Facebook, long after drawing down his economic interest in the company.

This reclassification was challenged by a group of institutional shareholders and mere days before Zuckerberg was scheduled to testify in Delaware Chancery Court last September Facebook withdrew the plan.

He has now been called upon to appear at an evidentiary hearing, likely to take place in autumn 2018, in connection with ongoing consideration of attorneys' fees in the underlying case.

Ultimately, the drop in share prices is not a disaster of epic proportions. Facebook's growth may be less than predicted, but the associated loss of share value takes them back to the same position that they were in at the beginning of May.

If changes are made to how Facebook structures its board and the role that Mark Zuckerberg plays, then the outlook for the robustness of corporate governance is improved as well as potential economic returns. There is a strong case for a revision of the board structure towards a more balanced board with an independent component.

Kirsty-Anne Jasper is deputy editor of Governance and Compliance

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions