28
Sep

Facebook ESG Analysis: Part 1

by Nomtha Ngumbela

In the second quarter of 2018, Facebook had 2.234 billion monthly active users. Fast-forward two years and the number currently stands at 2.701 billion monthly active users or better put, 35% of the world’s population is on the platform according to Facebook’s figures. Statistica however, put this number at 1.69 billion which still equates to a remarkable 22% of the world’s population, not including Instagram users. Regardless of one’s sentiments towards Mr Zuckerberg you cannot help but marvel at the ability of a small group of classmates to take an idea and turn it into a global social networking site that fosters connectivity to billions of people across 6 continents.

In a two-part insight series, ECM will look into Facebook’s Environmental, Societal and Governance practices highlighting what the company has gotten right and where it has failed to protect society and the environment (to a lesser extent). Ultimately, this investigation hopes to pit fact and fiction against in order for Investor’s to analyse Facebook as a viable investment case from an ESG perspective.  It is no surprise then that Facebook is the worlds most used social networking platform and has constantly evolved to include features such as Facebook marketplace, live video calling and stories to create stronger user engagement.

Over the years, Facebook’s risk management and due diligence processes have come into question, specifically in relation to the company’s operational transparency and the uncertainty regarding their ability to protect the privacy and information of its near 3 billion users.

Part 1: Tackling Facebook’s Governance Practices

While the average user may see the site as a platform for communicating with family and friends, it can more accurately be described  as an information hub packed with personal user data whose accuracy is continuously being enhanced in order for Facebook to sell elements of said data to its clients. Facebook achieves this by marketing advertising space on their platforms to clients. The company’s advertising segment contributes 98.5% of total revenue of $70.7billion (Interestingly enough, this represents approximately a fifth of South Africa’s Gross Domestic Product in 2018!)

While the average user may see the site as a platform for communicating with family and friends, it can more accurately be described  as an information hub packed with personal user data whose accuracy is continuously being enhanced in order for Facebook to sell elements of said data to its clients. Facebook achieves this by marketing advertising space on their platforms to clients. The company’s advertising segment contributes 98.5% of total revenue of $70.7billion (Interestingly enough, this represents approximately a fifth of South Africa’s Gross Domestic Product in 2018!)

Source: Facebook

What makes Facebook’s platform an important place for marketers to spend their advertising budget? The social networking site has various customer targeting options available to ensure clients have the best chance of reaching the correct consumer and, ultimately, securing a sale. To do this, Facebook utilizes:

  • Ad performances benchmarks for business to industry comparison
  • Provides clients with analytics that examine audiences by demographical insights, behaviours, and interests

All of this creates a far reaching and rigorously refined targeted advertising experience for clients.

To ensure that their clients and customers are receiving exceptional experience, Facebook has invested heavily in optimizing available social media content and an offering that is predominantly made for mobile viewing.

Why is this a big deal: Data Breaches

Facebook’s scrutiny is not without cause. For starters, Facebook has been the subject of substantial backlash by its users and privacy protection groups over the years. Some notable scandals are illustrated on a timeline below, and include the Cambridge Analytic (CA) data leak debacle of 2018. 

Timeline of notable Facebook Scandals

The British political consulting firm was accused of illegally collecting the personal data of over 87 million users for targeted political advertising during the US election and Brexit vote. Initially, CA paid consenting users to complete a survey for academic use, but it was later found that the CA app was not only collecting the information of consensual survey participants, but the company managed to access the information of the participant’s Facebook friends without consent. The harvested Facebook data was then sold and used to: 

  • Create tailored advertisements for each of the targeted individuals 
  • Build psychographic profiles of voters based on user activity   
  • Construction of presidential micro-targeting technique and strategy   -Examples include the targeting of what Americans saw in 2016 as ‘swing’ states  – Sending negative images of opponents to voters in swing state 

This is just a summary of one of the data breaches Facebook has experienced and management has had to account for.   In 2019 alone over 1 billion user records were leaked, which equates to nearly half of all active Facebook users!

Why is this a big deal: One big information sharing family 

The Facebook Group of companies includes Facebook, WhatsApp, Oculus, Crowd Tangle (A social analytics platform) and Instagram. The issue here is the potential sharing of user data for more accurate ad targeting purposes to increase Group revenue at the expense of consumer privacy and security. On their website, Facebook states that each of the companies have their own service and privacy policies however, there are situations where information is shared within the ‘family’ to, amongst other things “..facilitate support and integrate their activities and improve our services..” This is incredibly worrying when one considers how many users actively engage with each of these platforms on a daily basis, given the platform access to sensitive information during the process.

Source: Statista

According to Investopedia, WhatsApp is adding nearly a million users a day who mostly live in Europe, Latin America and India. This offers tremendous opportunity for personal data extraction, location sharing data, as well as consumer behavior information which many have speculated is the reason Facebook purchased WhatsApp for $19 billion in 2014. Though Facebook’s management has vehemently denied their use of personal data for ad targeting purposes noting that the intention of WhatsApp was never to be a platform for advertising by businesses

Who is to blame: Zuckerberg vs Zuckerberg?

Let us begin by first exploring the most topical management individual in the organisational structure of Facebook- Mr Mark Elliot Zuckerberg. Facebook’s Governance guidelines highlight the following:

“The Board is responsible for selecting and appointing the Chief Executive Officer and Chairperson of the Board, as well as the Lead Independent Director of the Board, if any. The Chief Executive Officer shall select and appoint all other officers of Facebook, subject to approval of such appointments by the Board or a committee thereof if required under the company’s Bylaws, applicable law, or other legal or regulatory requirements”

 Here are the facts:

  • As the Chair of the Board, Zuckerberg is afforded decision making capabilities at board level.
  • As CEO of the company, he can further veto the day-to-day decisions of executive management who he too is responsible for selecting. 
  • His voting control is further cemented by a 10-1 unequal Class B share voting rights which effectively gives him 57.7% of all the votes!

Zuckerberg’s ability to monopolise voting structures and recruitment decisions draw into question the ethics of how Facebook is run. By giving Zuckerberg ample control without adequate checks, even more doubt is cast on the legitimacy of the company’s management and governance practises.  To counter this and put to rest questions about the legitimacy of the company’s organisational structure, Facebook introduced a ‘Content Oversight Board’ in 2020 whose objective was to bring about greater independence and transparency to Facebook’s governance structures. Has this worked?

Well, the independent board has new powers such as the ability to overturn decisions made by Chairman and CEO Mark Zuckerberg with respect to the content allowed on Facebook and Instagram platforms.  This is a huge step in putting systems in place to control hate speech violations, doctored content as well has harassment being experienced by users on both platforms. The Content Oversight Board’s mandate also extends to complaints surrounding advertisements on the two platforms as well as Facebook Groups which have too often been ground zero for the spreading of false information and hubs for the creation of content which violates Facebook’s community guidelines and human rights.  The new Board is well funded with $130million budgeted over the next 6 years to focus solely on content related to ensuring the safety of users.

Global Challenges Require Global Solutions

The previous paragraphs draw quite a dim picture of Facebook however, the company has argued that it is addressing the challenges of operating in a constantly evolving data environment as best that it can.  Facebook’s operating environment differs from other Global companies in that data privacy laws are still new and are refashioned in each country as the government sees fit.

The model in which Facebook operates ultimately places the company in a position of ‘gate keeper’ of the personal and private information of billions of individuals. This, one cannot argue, is a massive undertaking. Consider the below facts:

  • Facebook removes seven million posts for sharing false information on coronavirus in the second quarter of its 2020 financial year
  • Facebook removed 3.2 billion fake accounts between April and September 2019, more than twice as many as the previous year.

Security inevitably increases the operational costs to Facebook and its family of companies as the company grapples with adhering to new privacy laws and regulations which differ from its home country, the United States. Facebook states this is often why it is subject to ongoing government investigations and penalties.

ECM ESG Framework

Putting the Facebook Governance structures through ECM’s ESG analysis framework, we question the effectiveness of the company’s current structures and practices as it pertains to Governance.  One area where we ask questions and require more comfort is the transparency of the selection process for executive and non-executive management that would place Mr Zuckerberg in two high profile roles.

Objective decision-making procedures are key to ensuring effective Corporate Governance and his position as both Board Chairman and CEO calls into question the independence of decision making in the company.

ECM notes that as the world’s most used and most interconnected public platform, security concerns and the need to be complaint will forever remain an operational risk of doing business in the sector.

As Facebook scales, adds additional features, and broadens its advertising targeting options for clients, Governments and consumers alike will look to ensure that the personal safety of user data is prioritised.   

For these reasons, we score the Corporate Governance at Facebook below the acceptable minimum and look to improve the score on the implementation of the following improvements

  1. Greater strength or internal control as it pertains to personal user data security
  2. Improved Board Composition with transparent independence
  3. A reduction of conflicts of interests between the Facebook ‘family’ of companies