Recently, the importance of compliance with corporate governance policies by the board has increased across the globe. The board of directors in corporations are pressured to adopt a stakeholder approach in which they consider the interest of all stakeholders rather than focusing on generating profits for the company. This report will evaluate the article posted by The Guardian titled ‘Facebook fined for data breaches in Cambridge Analytica scandal’ to understand the corporate governance issues raised in this case (Hern & Pegg, 2018). This report will evaluate stakeholder approach and its impact on organisations. This report will provide a description of Facebook along with its governance structure. The issue and its impact on the corporation will be evaluated in the report to determine its effect on stakeholders. This report will evaluate ethical behaviour, sustainability and leadership challenges faced by Facebook in this scandal.
A stakeholder approach provides that the managers of a company develop and implement policies in the company which are focused on satisfying the demand of its stakeholder in order to achieve effectiveness. The stakeholder includes those parties which are affected by the operations of the company. Generally, corporations merely focus on generating more profits, however, the stakeholder approach requires the board to evaluate who is their primary and secondary stakeholders and analyse their interest which is affected by the operations of the company to comply with corporate governance policies (Cooper, 2017). After this analysis, the board formulate and implement business strategies which are focused on sustainable growth of the company while fulfilling the interest of its stakeholders. The primary stakeholders of a company include employees, customers, shareholders, suppliers, local communities and others. The secondary stakeholders include trade bodies, competitors, government, media, social pressure groups and others.
A corporation has a separate legal entity from its owners based on which it can enter into legal contracts, and it can sue or get sued by third parties. Its members have a limited liability based on which their personal assets cannot be used to repay the debts of the corporation. A company can distribute its shares in the public to raise capital for its operations. Its decisions are taken by its board of directors who are responsible for managing its operations. Facebook is chosen for this report which is an America based social media and social networking service company (Facebook, 2018). The company was founded in 2004, and its headquarters of the company is situated in Menlo Park, California, United States. Currently, the company is the biggest social media website in the world with more than 2.27 billion monthly active users (Statista, 2018).
The management of Facebook is handled by its Chief Executive Officer (CEO), Mark Zuckerberg, who is also the Founder and Chairman of the company. He founded that company in 2004 and currently he is responsible for overall direction and product strategy of the company. His role is to lead the design of Facebook’s services and development along with development of its core technology and infrastructure (FB, 2018). The board of Facebook comprises 15 executive and non-executive directors who are responsible for taking business decisions and implementing policies for the company. Sheryl Sandberg is the Chief Operating Officer (COO) of the company who oversee its operations. Dave Wehner is the CFO who handles finance of the company. Mike Schroepfer and Chris Cox are the CTO and CPO of the company respectively. There are 6 independent (non-executive) directors in the company (Reuters, 2018). Zuckerberg owns 16 percent of Facebook’s shares and he commands 60 percent of its voting power via a special type of shares which shows that he has substantial decision making power in Facebook (Petry, 2018).
In 2017, it was reported that private data of over 87 million Facebook users were breached and used by Cambridge Analytica and this data was used to influence the result of the 2016 US Presidential Election. This issue goes back to the year 2010 when Facebook first introduce a platform called Open Graph which allows third-party developers to collect the data of people who use their services along with their friends. In 2013, an application titled ‘thisisyourdigitallife’ was launched on Facebook by Global Science Research which asks personal questions from users to create their psychological profile (Meredith, 2018). In 2014, Facebook terminated the Open Graph platform; however, in 2015, the data collated by Cambridge Analytica through the application was used in helping Ted Cruz’s presidential campaign. It was reported in 2017 that more than 50 million users were affected in this data breach and this number later revised as 87 million. The private data of all these users were collected to determine their political preference to help the presidential campaign of Donald Trump. Zuckerberg admitted the fault of Facebook and promised to change its privacy policies. A fine of £500,000 was imposed by the Information Commissioner’s Office (ICO) on Facebook (Waterson, 2018). In September 2018, login details of over 50 million users were stolen by hackers.
Facebook faced a massive backlash after this scandal, and the company was criticised across the globe. Due to the wrong decisions of Facebook, the privacy of more than 87 million users was breached. Facebook faced legal charges after this incident in which the company had to pay a fine of £500,000 (BBC, 2018). An investigation was conducted by Information Commissioner’s Office (ICO) in which it was found that Facebook has failed to comply to ensure that appropriate actions are taken by the company to protect the online security of its users. It was found that Facebook has failed to comply with appropriate security laws under which maximum penalty were imposed by ICO on Facebook. However, this amount is less than the income which is generated by Facebook in under 10 minutes. In the United States, the House Energy and Commerce Committee entertained this case in which Zuckerberg appeared before the committee. Zuckerberg provided that it was a fault of Facebook and new privacy policies will be introduced in the company which promotes transparency and social responsibility. Online users are not considered as customers; therefore, they are not governed by consumer rights give under the Consumer Guarantees Act (CGA). The board failed to focus on ethical consideration due to which the security of users was not improved by the board which adversely affected 50 million users because their login information was stolen (Statt, 2018).
The board of directors of Facebook did not consider the ethical implications of their decisions while forming business strategies. They did not consider their social responsibility towards their stakeholders to ensure that their rights are not violated by their business policies. The board of Facebook was focused on increasing the profitability of the company by attracting more developers and corporations to its platform (Baden & Harwood, 2013). The behaviour of CEO was not ethically when he gave the permission to Open Graph platform which allowed third-party developers to collect the data of those users who did not give their consent to share their data. The ethical implication of this business decision was later evaluated by the board after which the company terminated its Open Graph platform; however, it was too late. This decision was not imposed retrospectively due enabled Cambridge Analytica to use the psychological profits of 300,000 people who played the game along with their friends who did not give the permission to the company to collect their data. As per Virtues ethical theory, the decision taken by Zuckerberg was not ethically because he was focused on generating more capital rather than fulfilling his social responsibility as the CEO and Chairman of the company (Audi, 2012). The board of Facebook did not implement a stakeholder approach to understand the negative impact which their primary stakeholders including users will face due to their decision, thus, they acted in an unethical manner.
Sustainability is defined as fulfilling present needs without compromising the ability of future generation to fulfil their needs. There are three key pillars of sustainability which include economic, environmental and social (Hansmann, Meig, & Frischknecht, 2012). These pillars are referred to profit, planet and people. In the case of Facebook, the company failed to comply with one pillar of sustainability which is social which is referred to the people who are affected by the decision of the company. Due to this decision the share prices of the company suffered and they went down by 18 percent in less than a week. Due to this fall, the company has lost $35 billion in market value (Shen, 2018). The CEO and the board made a decision for short-term interest of the company rather than focusing on implementing a sustainable approach. Moreover, the decision taken by Facebook after this incident to continue to collect users’ data while promoting transparency was not sustainable as well. The company failed to ensure that appropriate security measures are taken to ensure the security of their users, and they should only collect their private data when they receive their consent. Due to this decision, hackers were able to collect login information of more than 50 million users after Cambridge Analytica scandal and after Zuckerberg made a promise to maintain a high standard in order to secure the data of Facebook users (Cimpanu, 2018). It shows that the CEO and the board had failed to adopt a sustainable approach which resulted in adversely affecting millions of Facebook users. The long-term prospective of Facebook is to increase the number of users globally and connect them with each other through its services. To resolve this issue and achieve long-term prospective, the corporation should improve its security infrastructure and avoid collecting and using personal data of its users.
Facebook faced various leadership and governance challenges which resulted in leaking private data of millions of Facebook users. The leadership of the company which include its CEO and other board members failed to implement a stakeholder approach while forming business policies. The number of non-executive directors is less in the company than compared to executive directors which give them an unfair advantage. There is a power struggle in the company because the executive directors can easily propose and implement a business strategy even if all the independent directors oppose to the same (Ebrahim, Battilana, & Mair, 2014). Due to the ratio of executive and non-executive directors, Facebook was able to launch Open Graph platform which was a move to attract more customers and generate the profitability of the company. The criticism of the board and Zuckerberg is that they focused more on revenues rather than social responsibility of the company. Even after finding out that the privacy and personal data of users are not safe, the company continued to collect and harvest their data. It shows the lack of ethical consideration in the leadership of the company due to which the login details of 50 million users were stolen a few months after the Cambridge Analytica scandal (Wong, 2018). Thus, the decision taken by the CEO and the board of Facebook is not effective to ensure that the privacy of its users is secured. They should avoid collecting their users’ data without their permission and improve their security policies to avoid future data breaches.
Conclusion
In conclusion, the importance of stakeholder approach and compliance with corporate governance policies is evaluated in this report. The governance structure of Facebook is analysed to determine whether the decision taken by the CEO and the board of the company was ethical and focused on fulfilling the social responsibility of the company. It can be concluded that the CEO and the board of Facebook failed to comply with relevant corporate governance policies which resulted in the scandal of Cambridge Analytica in which private data of over 87 million users were breached. Facebook failed to comply with relevant laws, and its board did not act in an ethical manner. The decision taken by the company did not comply with three pillars of sustainability because of various leadership and governance challenges faced by the company. It is recommended that Facebook should learn from its mistakes and increase the number of non-executives directors on the board. It should adopt a stakeholder approach and comply with corporate governance policies to ensure that it avoids collecting private data of users without their permission and implement appropriate security policies to protect their privacy.
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