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)
Copyright (c) 2019 Dow Jones & Company, Inc.
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