META Meta Platforms Inc

By Deepa Seetharaman and Jeff Horwitz 

As Facebook Inc.'s co-founder and chief executive, Mark Zuckerberg, holds extraordinary sway over the social-media giant. Wednesday's settlement with the Federal Trade Commission keeps his power largely intact, even as it calls for the board to tighten the reins on the company's privacy practices.

Along with a historic $5 billion fine, the agreement requires Facebook to create a privacy committee stocked with independent board members. Mr. Zuckerberg can't remove those directors for their "good-faith actions as privacy committee members" without the backing of investors who hold two-thirds of the voting shares, FTC Chairman Joe Simons said Wednesday.

Mr. Zuckerberg controls about 60% of Facebook's voting shares, so the new structure means he would have to collect at least some support from other shareholders to remove members of the privacy committee for cause.

At the same time, Mr. Zuckerberg can remove anybody from Facebook's board of directors, with or without cause, according to the company's corporate bylaws. It wasn't immediately clear if the FTC settlement trumps those bylaws.

"You want the board to be as independent as possible," said Harry M. Kraemer Jr., a professor of leadership at Northwestern University's Kellogg School of Management and the former CEO of Baxter International Inc. "If the CEO has appointed a person and has the right to fire them, how independent are they actually?"

In a Facebook post Wednesday, Mr. Zuckerberg said the changes to the company's governance would bring its privacy controls "more in line with our financial controls" and added that he and other executives "will have to certify that all of the work we oversee meets our privacy commitments."

He also said procedural changes under the settlement would slow down Facebook's introduction of new products but better protect its users.

"Overall, these changes go beyond anything required under U.S. law today, " he said. "The reason I support them is that I believe they will reduce the number of mistakes we make and help us deliver stronger privacy protections for everyone."

Yet the settlement does nothing to alter Facebook's underlying business model, which is based on showing personalized advertising to billions of users across its products. The changes issued by the FTC also do little to impair Facebook's ability to continue collecting vast amounts of information about those users.

Critics of the settlement, including dissenting FTC commissioners, said it wasn't clear if the privacy committee had the power to change Facebook's overarching product road map. The settlement also doesn't change Facebook's overall corporate structure, in which Mr. Zuckerberg serves as both CEO and chairman of the board.

Facebook's directors include a former executive of his personal foundation and two of the company's earliest investors. Two of the more recent independent directors added to the board, Kenneth Chenault and Jeff Zients, are among the candidates to join the new privacy committee.

Mr. Chenault was formerly the chief executive of American Express Co. and steered that company through the global financial crisis a decade ago, while Mr. Zients founded an investment firm and is the former director of the National Economic Council under President Obama.

FTC Commissioners Rohit Chopra and Rebecca Kelly Slaughter, the lone Democrats among the five commissioners, issued statements of dissent, arguing the FTC had failed to hold Mr. Zuckerberg more directly accountable for Facebook's privacy shortfalls. FTC officials opted not to hold Mr. Zuckerberg personally liable for the company's privacy shortfalls in recent years and didn't interview him during the investigation.

"The FTC Act does not include special exemptions for executives of the world's largest corporations, but this settlement sends the unfortunate message that they are subject to another set of rules," Mr. Chopra wrote in a statement rebuking the FTC's agreement with Facebook.

Mr. Zuckerberg has talked repeatedly over the past year about the company's mistakes regarding privacy and its commitment to addressing them. He said earlier this year that Facebook plans to offer encrypted messaging across all of its major products and allow people to make private conversations ephemeral, as part of a shift toward more private communications across the company's platforms.

Mr. Zuckerberg's voting shares and status as a founder and CEO have long given him ultimate power and influence over the company's strategy and direction. Mr. Zuckerberg has a lock on the bulk of Facebook's supervoting shares, each of which gives him 10 times the votes of average shareholders.

This allows him to overrule investor worries about the reach of his power, which he has done in recent years even as shareholders have become increasingly concerned about his dual role as CEO and chairman.

In the past, Facebook directors reliably approved Mr. Zuckerberg's plans, even when controversial, according to some shareholders and legal filings. In August 2015, for example, Mr. Zuckerberg proposed an overhaul of Facebook's capital structure that would allow him to keep his majority voting rights while giving a large portion of his wealth away. According to at least one shareholder lawsuit, board directors including venture capitalist Marc Andreessen did little to vet the plan and protect shareholder interests. Facebook at the time said the process was fair and thorough, and Mr. Andreeseen declined to comment.

In recent years, the composition of the board has shifted to include more seasoned directors with experience in other industries, such as Mr. Chenault and Mr. Zients. And as Facebook's troubles accumulated, board members more frequently conveyed their alarm and recommendations to Mr. Zuckerberg and Chief Operating Officer Sheryl Sandberg.

The majority order from the FTC said it would limit Mr. Zuckerberg's "unfettered control" over Facebook's privacy practices by creating the new board committee. According to the FTC's announcement, the committee will hire and oversee a privacy assessor to certify the company's privacy practices.

The full scope of that committee's power couldn't immediately be learned. The members will be appointed by a nominating committee, according to the FTC settlement.

This structure brings Facebook more in line with its peers, said Jonas Kron, director of shareholder advocacy for Trillium Asset Management, a governance-focused investor that has pushed for checks on Mr. Zuckerberg's power. But Mr. Zuckerberg's control of the majority of Facebook's voting shares limits the impact of the FTC's mandate, he said.

"At the end of the day, a director has to meet with his approval before they would be voted onto the board," Mr. Kron said.

Mr. Chopra, the FTC commissioner, wrote in his dissenting opinion that the committee "has no authority over the design, budget or management of the privacy program."

Other Facebook critics echoed that concern.

"The 'privacy committee' is just nuts," said Marc Rotenberg, president of consumer advocacy group, Electronic Privacy Information Center.

Mr. Rotenberg added that he thinks the FTC was wrong to focus on checking Mr. Zuckerberg at all. The real answer, he said, was to break up the company.

Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com

(END) Dow Jones Newswires

July 24, 2019 16:05 ET (20:05 GMT)

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