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John Kinsellagh
John Kinsellagh
Articles (112) 

Facebook Needs a Housecleaning

New York Times story reveals a deceitful scheme employed by senior executives to mislead the public, regulators and shareholders

November 20, 2018 | About:

Last Thursday, The New York Times published a damning exposé about how Facebook’s (NASDAQ:FB) two most senior executives engaged in a concerted and deliberate scheme to shield from regulators, the public and security analysts the extent of the company’s data breaches and attempted to downplay the deleterious effects the fallout from these revelations would have for the company.

The portrait that emerges of CEO Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg is not a flattering one. After reading about their attempts to beguile as well as their colossal errors in judgment, one wonders how the Zuckerberg-Sandberg duo were entrusted with running a $400 billion enterprise.

In the wake of the bombshell article, rather than express remorse or accept responsibility, an unrepentant Zuckerberg decided to go on the attack. Indeed, during a recent company-wide meeting, he allegedly called the Times story “bulls---.”

But the bad faith exhibited by both Sandberg and Zuckerberg for not disclosing the extent and scope of the vulnerability of the company’s network was widespread long prior to the Times report. As I noted previously, it was interesting to view the duplicity and outright deception employed by Facebook's senior executives since the scandal first erupted. Zuckerberg was positively mealy-mouthed, appearing solicitous when addressing concerns for users' privacy, yet, in the same breath, failing to disclose to regulators with specificity what steps his company will implement to ensure privacy safeguards are in place.

Although Zuckerberg is often the target of the bulk of the criticism directed at Facebook, Sandberg is perhaps the most culpable. She was the architect who created the data harvesting business model and played a substantial, if not dominant, role after the privacy scandal in employing a scheme to deflect blame for the fallout from the bad publicity and ward off impending regulations.

During the Cambridge Analytica scandal, while Zuckerberg was busy demonstrating his imprudence by failing to respond to the crisis in a timely and meaningful manner, Sandberg, inexplicably, was missing in action.

Additionally, despite her pious public pronouncements about her concern and unwavering dedication to safeguarding users' privacy and limiting the unauthorized sale of private data to third parties, as detailed by the Times report, Sandberg did nothing and had no intention of doing anything to effect meaningful measures to bring about the necessary changes.

Indeed, when Alex Stamos, the company’s director of security, disclosed to the Facebook board that it had still not yet fully addressed the exposure of its network one year after the privacy scandal, Sandberg was livid. She yelled at Stamos, “You threw us under the bus!” This is not the behavior of someone who is committed to safeguarding users' private data.

The extent of the chicanery employed to contain the damage caused by exposing Facebook’s unsavory and surreptitious business practices was remarkable. Sandberg hired a lobbying firm to help keep regulatory action at bay while simultaneously making public statements that the company was sincerely interested in curing its privacy data abuses. An opposition research firm was also retained to criticize Facebook’s critics, such as Apple (NASDAQ:AAPL) CEO Tim Cook.

The subterfuge and coverup started at the top and worked its way down the corporate food chain, leading to comical results. The “nothing to see here” sentiment adopted by Sandberg is perhaps what prompted Carolyn Everson, Facebook's vice president of global marketing solutions, to comment at a Wall Street Journal-sponsored CEO Council meeting in London this spring that, “We have not seen wild changes in behavior with people saying 'I’m not going to share any data with Facebook anymore.'” Everson told the Journal the company also didn’t expect stricter privacy laws, which could lead consumers to opt out of targeted ads, to cut into its ad sales, noting, “We are not anticipating major changes to our overall revenue and business model.”

This statement concerning minimal potential loss of revenue was not only preposterous, it constituted a gross misrepresentation that was so misleading it was close to being actionable under the U.S. Securities laws.

Now that Sandberg and Zuckerberg have squandered their credibility, who is going to accept at face-value statements they make in the future? In light of the gross incompetence and conniving exposed in the Times article, it is astonishing that they currently retain their senior management positions.

The damage Sandberg has caused the company’s goodwill and reputation may prove to be irreparable. As such, many are now calling for her ouster. Zuckerberg’s removal is potentially problematic. Since he maintains a controlling interest in the voting stock, absent a provision in the bylaws or articles of incorporation, the only other available remedy would be filing a shareholder’s derivative action.

Given the blithe indifference with which past misrepresentations were made, shareholders may want to question whether they want at the helm a COO who has shown on numerous occasions a callous disregard for addressing the substantial problems facing the company.

Disclosure: I have no position in any of the securities referenced in this article.

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About the author:

John Kinsellagh
John Kinsellagh is a freelance writer, former financial advisor and attorney specializing in civil litigation and securities law. He completed the Boston Security Analysts’ Society course on "Investment Analysis and Portfolio Management."
He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community and personal finance.
He is the author of "Election 2016" and "The Mainstream Media-Democratic Party-Complex," both available on Amazon. Follow him on Twitter @jkinsellagh

Rating: 5.0/5 (4 votes)

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Comments

jimmymac56
Jimmymac56 premium member - 3 weeks ago

Yes--great article! in addition to the misconduct regarding privacy concerns, FB is not forthcoming regarding the negative effect both Facebook and Instagram have on mental AND physical health. I refer all readers to the documentary "Screenagers" which was produced by a Seattle physician. Please watch the trailer online and search for a screening in your area. It has been shown at thousands of schools, churches and community centers across the U.S. As a parent of a teen, I can attest to the negative impact FB services have on kids. As an investor I would love to buy FB at $136. (Like Goog, it is a cash machine). As a human being, I won't touch it.

Cash-Centered Creep
Cash-Centered Creep - 3 weeks ago    Report SPAM
John,

Very good piece here. One of Warren Buffett (Trades, Portfolio)'s four key conditions for making an investment is that the company be run by honest, competent managers - it can make the difference between experiencing steady profit growth and being engulfed in one crisis after another. As your article effectively makes clear, Zuckerburg and especially Sandberg fail this test in a glare. I had written favorably about Facebook previously, though ruled it out as an investment on grounds of valuation and on being overly reliant on advertising for its revenue. Suffice to say, my view has darkened since then.

Regards,

CCC

John Kinsellagh
John Kinsellagh premium member - 3 weeks ago

Thanks for your compliment. Good point about Buffett's often overlooked qualititative factor for value investing. I am continually amazed why more security analsyts don't price this factor into their valuation models, all the more so with Facebook. I continue to believe that over time, when the chicanery ends and the reality of burdensome regulations become a reality (in no small measure due to the dynamic duo's deception) the business model will be severly impaired.

John K

yesudeep
Yesudeep premium member - 3 weeks ago

"Facebook Needs a Housecleaning". Umm, no. It does not.

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