The Innovative Structure That Could Save Facebook
By Ann Florini and Brett Hurt
Image credit: Techonomy.com
As Facebook confronts public outrage and mutiny among its employees for mishandling multiple decisions about its role, it is becoming clear that it cannot solve its conundrums without a major change in its business model. And a new model is readily available: for-benefit status.
For decades, a misguided ideology has warped companies, economies, and societies: that the sole purpose of corporations is to maximize short-term returns to one set of stakeholders: those who have bought shares. Neither law nor history require this to be true.
But shareholder value-maximization ideology has become cemented in far too much corporate practice, at the expense of societal well-being. This is manifested in many ways: a slavish adherence to the judgement of the “market,” even when other social signals are more powerful; executives enriched by stock options; companies fearful of “activist investors” who attack whenever stock prices fail to meet quarterly “expectations”; and often-frivolous shareholder lawsuits pushing for stock gains at all costs.
The pandemic, however, has accelerated an already- spreading recognition that shareholder value maximization is an often-harmful choice, not by any means a moral imperative, or even a fiduciary responsibility.
Major institutions of capitalism are converging on a new vision for it. The 2019 Business Roundtable CEO statement said that corporate strategy should benefit allstakeholders– including shareholders, yes, but equally customers, employees, suppliers, and the communities in which companies operate. Blackrock CEO Larry Fink’s recent annual letters assert new views of how that investment company, the world’s largest, should invest the trillions it oversees. Fink’s 2019 letter spelled out a new vision for corporate purpose; the 2020 one focused in on business’ responsibility around climate change. The B Corporation and Conscious Capitalism movements are growing. The World Economic Forum is championing a “Fourth Sector,” combining purpose with profit. Business schools, facing student rebellions against a purely profit-maximizing curriculum, are rapidly changing what they teach.
And with society under siege, many more businesses, including social media, are scrambling to seem like good corporate citizens. They have no choice.
Facebook, for example, has doubled down on philanthropy and new efforts to combat misinformation, even as usage and share price soar. Platforms like WhatsApp (owned by Facebook) have become essential services to connect people whose physical ties have been abruptly severed during the global pandemic. Shelter-in-place has become, in many ways, shelter-in-Facebook-properties.
But Facebook and its brethren remain fragile. Since the U.S. 2016 election, Facebook has faced governmental hearings and regulation, public uproar (#deleteFacebook), and huge fines for invading privacy and undermining democracy.
A giant company that is simultaneously essential and pilloried is vulnerable. Just ask the ghosts of John D Rockefeller and his fellow robber barons, whose huge monopolies industrialized America more than 100 years ago. Journalistic muckrakers and public outrage targeted them for their abusive practices, until the government finally broke up their companies via antitrust legislation.
Because Mark Zuckerberg maintains complete majority control of Facebook, he could unilaterally quell public opprobrium and fend off heavy-handed regulation singlehandedly, by transforming Facebook into a new kind of business: a for-benefit corporation.
Under the Public Benefit Corporation legal model, firms bind themselves to a public benefit mission statement, and carry out required ongoing reporting on both the standard financials and on how the company is living up to its mission. That status protects the company against profit-demanding shareholder lawsuits, and also attracts employees and investors who want to combine profit with purpose.
Evidence abounds that this model allows for top-tier financial performance. For example, data.world, the B Corporation founded by one of us (Brett), has more financial potential than his previous five start-ups which were not benefit corporations – in part because its for-benefit status causes customers, partners, and investors to relate differently to the company. Encoded in data.world’s public benefit statement is a mission that supports a free, non-advertising-supported data-oriented social network enabling anyone to collaborate on public, or open, datasets and data projects. This includes critical public COVID-19 data. All investors realize they are supporting that component of data.world for societal benefit.
A for-benefit Facebook could similarly relate to the world differently, avoiding many of the reputational shocks and regulatory responses that have led to huge stock dips and enormous fines. Its operations would align with Mark Zuckerberg’s proclaimed purpose to enable the potential abundance that results from connecting everyone in the world. Imagine a Facebook town hall as a true public square, not just another way to gather and sell people’s data without their explicit consent. Imagine a Facebook that put its users first and its advertisers second; that revealed where ads came from; that earned your attention in a way that you controlled rather than through machine-driven algorithms maximizing your attention for good or ill. Such a for-benefit Facebook could create true buy-in and transparency with its massive community around the world.
Of course, such steps as Facebook’s new Oversight Board, which may provide some meaningful review, don’t require a legal change. But if shareholders and employees continue to be rewarded primarily by the success of the problematic ad-revenue model, a continuing conflict between private gain and public benefit makes it impossible to have confidence about what is happening behind the scenes. A shift to for-benefit incorporation and appropriate certification brings with it different performance metrics and accountability systems with public scores.
In changing Facebook into a for-benefit corporation, Mark Zuckerberg could insulate himself and his company against presidential rage, and rehabilitate his reputation and his company’s. It would likely create vast ripples both in Silicon Valley and beyond it, and might help transform capitalism itself.
Ann Florini is clinical professor at the Thunderbird School of Global Management at Arizona State University, where she directs the school’s Washington DC programs.
Brett Hurt has founded and led six startups, including data.world, which is a certified B Corporation. He is also a Techonomy member.