If you feel as if you failed in your 2018 new year's resolutions, rest assured you're not the only one.
Facebook CEO (FB 3.91%) Mark Zuckerberg famously posts his annual goals each year, and for 2018, he said he wanted to "fix" Facebook. With one month left in the year, it's safe to say that the Zuck fell a little short there.
The social network's problems have only metastasized over the year as concerns about Russian meddling spilled over into the Cambridge Analytica scandal, as well as the platform's use by third parties to aid genocide against Rohingya Muslims in Myanmar. Such problems have generated broad-based outrage against a company that many now believe is bad for democracy. Salesforce CEO Marc Benioff compared the company to cigarettes -- addictive but ultimately toxic.
Facebook's disastrous year culminated in a dagger of an investigative report from The New York Times. The story portrayed Zuckerberg and his right-hand executive, COO Sheryl Sandberg, as amoral tyrants involved in a game of Scandal Whac-A-Mole, using underhanded tactics to keep bad news out of the press. Perhaps the most damaging finding in the Times report was that Facebook had hired Definers Public Affairs, an opposition research firm, to tarnish the company's opponents by both tying them to liberal philanthropist George Soros and accusing them of anti-Semitism.
Facebook's response did little to help its image. It initially denied many of the most damaging claims before copping to them the day before Thanksgiving in a classic "news dump." In the face of critics' calls for heads to roll, including those of Sandberg and Zuckerberg, the Facebook founder defended his management team and issued a vague promise to "do better," as he has after past scandals when he's found himself on the hot seat. Investors should remember that it would take nothing short of a palace coup to unseat Zuckerberg, as he's both the CEO and chairman and controls a majority of the company's voting rights.
However, Facebook's scandals seem like a direct result of a notable absence on its executive team, and as long as the company overlooks this key need, these types of problems are likely to continue. I'll get to that later, but to understand why it's so important, we need to first explore Facebook's business model.
Facebook CEO Mark Zuckerberg at the company's F8 developer conference. Image source: Facebook.
Facebook is not a tech company
"Tech" is a word which can work magic on the stock market. Almost every company wants to present itself as a tech firm in some capacity these days. Having status as a "tech" company connotes huge valuations, high growth, an addressable market often in the billions, and, above all, dreams about the future and the power of "optionality."
But if you scratch a tech company, you often get something else. Netflix is really an entertainment company that's simply taking advantage of streaming technology. Tesla, despite its many secondary projects, is essentially an automaker, subject to the same manufacturing constraints and challenges as other carmakers. Uber boils down to a glorified taxi service with some experiments layered on top, and one that looks exceedingly overvalued, as user growth is quickly slowing and the company is still losing billions.
Similarly, Facebook is really a media company. The social network's business model is identical to the one newspapers and other media businesses have used since the invention of the printing process: It provides content and sells ads next to it.
Sure, the company employs thousands of software engineers, and its sophisticated algorithms have helped make it an advertising wizard, but the core business is still the same as any media company -- it feels the same to the user, who doesn't see everything going on under the hood.
Facebook's fat operating margins are a product of its social media monopoly and the value it presents to advertisers because of the precise targeting its user data enables, but there's an analog equivalent for virtually everything on Facebook. The platform is essentially a digital combination of a newspaper, photo album, bulletin board, and messaging capabilities.
Facebook's dependence on content, and news in particular, is clear, as 43% of Americans get news from the social network, and the company has developed a co-dependent relationship with publishers, who rely on its huge audience to get page views. But considering Facebook's dependence on news and the many news-related scandals that have popped up in recent years, it's inexplicable that the organization doesn't have anyone on its board or its executive team with significant media or journalism experience.
Heavy hitters but still a big hole
The lineup on Facebook's executive team and board of directors is impressive. The company identifies five executives as its management team:
- Chief Executive Officer Mark Zuckerberg needs little introduction. The whiz kid started the company in his Harvard dorm room and dropped out of the prestigious university to build it into the titan it is today. Starting the company in college, Zuckerberg had no significant experience before Facebook.
- Chief Operating Officer Sheryl Sandberg brings a resume made for the C-suite. She graduated with highest honors from Harvard undergrad and Harvard Business School and has worked for McKinsey, the top consulting firm, as well as the World Bank, Google, and the Treasury Department.
- Chief Financial Officer Dave Wehner has degrees in chemistry and applied physics and previously worked for Zynga and Allen & Company, an investment bank.
- Chief Technology Officer Mike Schroepfer has two degrees in computer science and experience at Mozilla and Sun Microsystems.
- Chief Product Officer Chris Cox came to Facebook in 2005, just a year after getting his bachelor's degree in symbolic systems at Stanford. He started as a software engineer, rose through the ranks, and now runs Facebook's family of apps.
On its board, Facebook has nine members, two of whom are Zuckerberg and Sandberg. Once again, there's nary a hint of news or journalism experience to be found, with tech and business backgrounds heavily represented. In addition to the CEO and COO, there's:
- Marc Andreessen, the co-founder of venture capital firm Andreessen Horowitz. Andreessen brings founder-level experience at various internet and software companies including America Online, Netscape, and Opsware.
- Erskine Bowles, a former president of the University of North Carolina and White House Chief of Staff under President Clinton. Bowles has extensive experience in the finance world, starting his career with Morgan Stanley and going on to work with several investment firms afterward.
- Kenneth Chenault, who joined Facebook's board just this year, making him the newest member. Now the chairman and managing director of General Catalyst, a venture capital firm, Chenault was CEO of American Express for 17 years.
- Susan Desmond-Hellmann, the CEO of the Gates Foundation, the philanthropic giant founded by Microsoft co-Founder Bill Gates. Prior to that, Desmond-Hellman served as chancellor of University of California, San Francisco, and has a background in biotech and pharmaceuticals, previously working for companies like Genentech and Bristol-Myers Squibb.
- Reed Hastings, the CEO and co-founder of Netflix. Prior to Netflix, Hastings founded Pure Atria Software, a maker of software development tools.
- Peter Thiel, Facebook's longest serving board member after Zuckerberg, who joined in 2005. Thiel co-founded PayPal and is president of Thiel Capital, an investment firm he started in 2011. He's also a partner in the venture capital firm Founders Fund.
- Finally, there's Jeffery Zients, the CEO of the Cranemere Group, a diversified holding company, and the former director of the National Economic Council for President Obama.
Facebook may have 12 of the brightest and most accomplished minds in the country overseeing the company, but the lack of anyone with a media or journalism background and the requisite understanding of journalistic ethics and practices native to a news organization is a glaring blind spot. Given that ignorance, it's not surprising the company has suffered scandal after scandal from the hijacking of its news feed. That Facebook hasn't put someone from that field in its C-suite or on its board signals that more than two years after Russian operatives misused the site to influence voters, the company is still in denial that it's a media business.
The solution
Calls for Sandberg or Zuckerberg to step down may be too extreme. The two have worked hand in glove for more than 10 years since Sandberg became COO in March 2008, when Facebook was in its relative infancy. Moreover, Sandberg essentially built the company's ad business. Zuckerberg, the founder, chairman, and majority voting shareholder, isn't going anywhere.
Instead, Facebook should a name a chief content officer, a C-level executive with the necessary media experience to ensure that Facebook's news feed doesn't continue to get manipulated by hate speech or political operatives. It should also design a media strategy that makes the platform something more than just a giant free speech bubble that can easily turn toxic, which is how Facebook and other social media platforms like Twitter seem to operate today. Such a strategy would help Facebook in its mission to connect people in a positive way.
While the social network's making changes, adding some ethics oversight would be a smart move as well. Ethics oversight might be a sensible role for a new board member, alternately, Facebook can ensure that its chief content officer brings ethics credentials to the table. Such an action would signal that the company is serious about cleaning up the darker corners of the site as well as keeping its broader strategy in check, so that it doesn't create a public relations debacle like hiring an opposition research firm again.
Facebook seems reluctant to make such changes on its own, but the stock is crying out for an activist investor to come in and flip the board room tables over. Not only is Facebook flailing its way through crisis after crisis (the cumulative effect of which now poses a mortal threat to its brand), but the stock is also dirt cheap today, down 24% year to date and 38% from its all-time high this summer. An activist coming in and pushing for such changes would likely propel the stock higher and provide Facebook with a much-needed check on a management team that has consistently overlooked the negative consequences of the platform.
The social network could use the credibility, and it desperately needs to reestablish trust with its user base. User growth has plateaued in North America and Europe, its key markets, and could soon decline if distrust in the company keeps building and the drumbeat of bad news continues.
Now's the time for Facebook to get real and take a good look in the mirror. What's staring back isn't a tech company but a media business with the same vulnerabilities and consumer expectations as any other.
