MGMT4813 UCO Corporate governance and business ethics challenges at Facebook Read the attached article about corporate governance and business ethics challenges at Facebook. Use this and additional sources to answer the following questions.
Based on the assigned readings and lecture notes, identify and discuss Facebooks’s key stakeholders.
Based on information provided in the article, how did the firm prioritize its key stakeholders prior to this scandal? Explain your answer.
Describe the legal and ethical issues related to Facebook’s use of customer data.
What policies should the board of directors implement to prevent future abuses of customer data? How does Mark Zuckerberg’s role in the firm as a major shareholder and CEO complicate these efforts?
What policies and procedures should the firm implement to prevent future abuses of customer information? Explain your answer.
Written assignments must have an introduction and a conclusion paragraph. Note that these paragraphs must be separate from the body of the paper in which you answer assigned questions.
The written analysis may be up to 5 pages and no less than three in length, excluding exhibits (no limit).
Use a 12 point font and have one inch margins.
Papers must be typed with double spaces.
You absolutely must include a list of references at the end of the paper. Use the APA style. For example references, please refer to the APA style tutorial available at http://www.apastyle.org/learn/tutorials/basics-tutorial.aspx. Use a minimum of four (4) credible outside reference sources.
Use page numbers and put your name on the first page of each assignment. The Washington Post
The Facebook scandal isn’t really about social media. It’s about
By Jacob Silverman
As wizened consumers, we’ve learned to be cynical about the commodification of our privacy at the hands of
tech corporations. Still, it’s one thing to know in principle that industry giants like Facebook are spying on
practically everything we do and say; it’s quite another to see it in action. But that’s just what we have, thanks
to recent reporting by the New York Times, which revealed how Mark Zuckerberg, who’s expected to act as the
trusted custodian of the personal information of more than 2 billion people, has allowed his company’s
partners — Netflix, Amazon and Spotify, among many others — access to users’ most intimate
Some arrangements enabled Facebook’s partners to read and delete users’ private messages; others had access
to users’ friends and their data. In some cases, the deals appeared to be so broad that Facebook’s partners
claimed that they weren’t even aware that they had access to certain data streams.
The Times’ reporting offers a necessary window into the surveillance economy and the emerging economic
logic of “surveillance capitalism.” We are beginning to see how the trade in data — much of it done behind the
scenes — is also an exchange of influence and power. We are becoming aware of companies’ astonishing
information appetites, according to which all data is potentially useful. Even carmakers like Ford are beginning
to tout consumer data as a major revenue stream on par with the selling of automobiles. In other words, the
Times’ reporting doesn’t just implicate Facebook: It’s an indictment of the whole economic system in which we
None of that is to let Facebook off the hook, of course. The latest reporting has grim legal implications for the
company, especially since it is operating under a consent decree with the Federal Trade Commission in which it
essentially pledged to guarantee users’ privacy and to enact a comprehensive privacy program. There’s little
evidence that agreement has been respected. The overall picture is of a digital marketplace overseen — with
varying degrees of inattention — by Facebook, in which it gives access to its customers to whomever will pay.
Facebook may not be selling bulk user data directly, but it’s giving outside companies the ability to gather
information en masse about its users. That amounts to almost the same thing. (And these deals were concealed
For Facebook, scale is everything, so it had every incentive to allow other companies access to its users,
provided they did it on Facebook’s terms. And from its Beacon scandal in the late aughts to more-recent
questions over Cambridge Analytica, Facebook has shown a tendency to act first and offer a pro forma apology
later. Years of self-regulation have revealed that the company is incapable of restraining its appetites or of
seeing its users as anything but a resource to be mined. The same might be said of Google, which has its own
history of overzealous data collection.
In an era when consumers are increasingly transparent to the companies that furnish them goods and services
(not to mention their governments), perhaps we should expect scandals such as these. But we shouldn’t allow
that foreknowledge to become an excuse for complacency. Most people still have no idea to what extent their
communications and everyday behaviors are being monitored, nor do they understand how personal data is in
turn leveraged for targeted advertising, credit scoring, police threat assessments and job applications.
Companies like Facebook and Google are now using anything from search histories to fluctuations in WiFi
signals to try to anticipate where we are and where we’ll go next. To be a modern consumer is to be watched,
but the last year’s scandals have shown that coercion and secrecy are part of the bargain.
In a lecture this year, Shoshana Zuboff, the author of a forthcoming book about surveillance capitalism, said
that the manipulation endemic to the surveillance economy puts the lie to the once widely accepted notion that
social networks are naturally democratizing and empowering. “Digital connection,” she explained, “is now the
brazen means toward others’ market ends.” More galling, Facebook hides behind the benevolent rhetoric of
emancipation and connectivity as it frisks us for our most intimate information. Connectivity seems less like a
human right, as Zuckerberg has argued, than like a means to surveil a good chunk of the world’s population. As
Facebook generates billions in profits by exploiting access to our attention and our personal lives, it tells us this
arrangement is good for us. It’s long past time to ask why we ever believed them.
Jacob Silverman is the author of “Terms of Service: Social Media and the Price of Constant Connection.” Follow
AND BUSINESS ETHICS
Sharon D. James, PhD, CFA
STAKEHOLDERS AND FIRM PERFORMANCE
▪ Stakeholders: Individuals or groups with an interest,
claim, or stake in the company
▪ Key stakeholders: Stakeholders that have a direct or
indirect impact on firm profitability. Priority is given
based on the most direct influence on performance.
▪ Priority: Customers, suppliers, employees, communities in
which they live, government/regulators, creditors, and
▪ Fallacy argument: The firm’s priority (fiduciary duty) is first to
its stockholders. This logic is inconsistent with priority in
liquidation where all other stakeholders have priority of
claims over stockholders (the residual claimants in
bankruptcy liquidation). Stakeholder theory follows more
closely to the legal definition of priority (i.e., fiduciary duty).
▪ Deals with conflicts of interest when decisionmaking authority is delegated from one
stakeholder to another
▪ Most common agency issues arise between
owners/stockholders and managers:
▪ Stockholder – Principal and Senior managers – Agent
▪ Internal agency problems involve delegation of
authority from senior managers to lower level
▪ Information asymmetry: Agent has more
information about the resources being managed
than the principal
▪ On-the-job consumption: Describes the behavior
of senior management’s use of company funds to
▪ Empire building – Buying new businesses to
increase the size of the company through
CHALLENGES FOR PRINCIPALS
▪ Shaping the agents’ behavior to act in
accordance with the firm’s strategic imperatives
▪ Reducing information asymmetry and
preventing abuses of power
▪ Developing mechanisms for removing agents
who do not act in accordance with firm
ETHICS AND STRATEGY
• Accepted principles of right or wrong that govern the
conduct of a person, the members of a profession, or
the actions of an organization
• Accepted principles of right or wrong governing the
conduct of businesspeople
• Situations where there is no agreement over exactly
what the accepted principles of right and wrong are
ETHICAL ISSUES IN STRATEGY
▪ Arise from potential conflict between:
▪ Firm goals and objectives
▪ Goals of individual managers/employees
▪ Fiduciary duty to key stakeholders
▪ Ethical dilemmas arise from conflicts between what is
necessary in the ordinary course of business and
what is prudent with respect to the best interest of
▪ Government regulations where questions of illegality may not
be clear cut
▪ Contingent (future potential) liability resulting from firm
actions may not be currently quantifiable
A FIRM’S FIDUCIARY DUTY AND
RIGHTS OF KEY STAKEHOLDERS
• Timely and accurate information about their
• Be fully informed about the products and services they
• Safe working conditions
• Fair compensation for the work they perform
• Just treatment by managers
• Expect contracts to be respected
• Expect that the firm will abide by the rules of
competition and not violate the basic principles of
the general public
• Expect that a firm will not violate the basic
expectations that society places on enterprises
EXAMPLES OF UNETHICAL BEHAVIOR
ARISING FROM AGENCY PROBLEMS
• Managers pursuing personal benefits at the expense of the firm,
customers or other key stakeholders
• Managers use their control over corporate data to distort or hide
information to enhance their personal financial condition or the
competitive position of the firm
• Aimed at harming actual or potential competitors to enhance the
long-run prospects of the firm
• Managers rewriting the terms of a contract to make it favorable to
the firm to the detriment of key stakeholders (e.g. bundled vs.
unbundled prices often amount to unfair treatment of customers)
EXAMPLES OF UNETHICAL BEHAVIOR
ARISING FROM AGENCY PROBLEMS
Substandard working conditions
• Managers underinvest in working conditions or pay employees
• To reduce their production costs
• Occurs when a company’s actions directly or indirectly result in
pollution or other forms of environmental harm
• Can arise when managers pay bribes to gain access to business
ROOTS OF UNETHICAL BEHAVIOR
▪ Personal ethics: Generally accepted principles of
right and wrong governing the conduct of
▪ Personal ethics develop from how we were raised by
our families or care givers
▪ Failing to ask oneself if a decision is ethical
▪ Some organizational cultures reward winning by
any means necessary, thereby de-emphasizing
▪ Pressure to meet unrealistic performance goals
▪ Unethical leadership from top-level managers
STAGES OF MORAL DEVELOPMENT
▪ Favor hiring and promotion with a well-grounded
sense of personal ethics
▪ Build an organizational culture that places a high
value on ethical behavior
▪ Code of conduct/ethics: Formal statement of the
ethical priorities to which a business adheres
▪ Ensure that leaders practice and preach ethical
▪ Ensure people consider the ethical dimension of
▪ Use ethics officers
▪ Put strong governance processes in place
▪ Include a code of conduct/ethics committee on the board of
▪ Tie performance appraisal and promotion to ethical outcomes
▪ Implement checks and balances to ensure fair business
practices (e.g., customer surveys to ensure quality service)
▪ Establish clear policies on the consequences of
unethical behavior and act swiftly to correct abuses
before mandated by regulators or courts
BEHAVING ETHICALLY: ENRON
The Smartest Guys in the Room recounts how the
unscrupulous behavior of Enron’s senior leadership
resulted in, at the time, the largest corporate collapse in
Enron’s success was a mirage built through accounting
loopholes, networks of shell companies, and questionable
audit practices that allowed senior executives to hide
billions of dollars in losses from failed deals and projects.
BEHAVING ETHICALLY: ENRON
Enron eventually declared bankruptcy in December 2001.
Many employees lost their pensions and life savings in what many
consider the greatest securities fraud of all time.
The fallout from the corporate governance failings at Enron and
other companies created a renewed interest and focus on the role of
ethical business practices.
Executives now bear personal responsibility for the accuracy of all
financial reporting within their companies, and corporate boards are
now required to fill the majority of seats with independent directors.
THE MARKET FOR CORPORATE GOVERNANCE
• Sarbanes-Oxley Act is a law that set new or increased standards for the
boards of public US companies and accounting companies.
CORPORATE GOVERNANCE MECHANISMS
▪ Used by principals to:
▪ Align organizational incentives with agents’ personal
▪ Monitor and control agents’ (ethical) behavior
▪ Between stockholders and senior managers
▪ Board of directors, Stock-based compensation, Financial
statements/audits, corporate takeover constraint
▪ Between senior managers and lower level managers
▪ Code of conduct/ethics
▪ Strategic control and monitoring systems
▪ Award ethical behavior and create an environment for
BOARD OF DIRECTORS
▪ Inside directors: Senior employees of the
▪ Outside directors: Not full-time employees of
▪ Provide objectivity to the monitoring and evaluation of
▪ Stock options: Right to purchase company stock
at a predetermined price at some point in the
▪ Strike price – Stock’s trading price when the option was
▪ Motivate managers to adopt strategies that increase
the share price of the company
▪ Has become increasingly controversial
▪ Aligns management and stockholder interests
FINANCIAL STATEMENTS AND
▪ Quarterly and annual reports of publicly
traded companies are filed with the SEC:
▪ to give accurate information about the way
the agents run the company.
▪ SEC requires that the accounts be
audited by an independent and
accredited accounting firm:
▪ to make sure managers do not misrepresent
the financial information.
▪ Risk of being acquired by another company
▪ Corporate raiders – Purchase large blocks of
shares in companies that appear to be pursuing
strategies inconsistent with maximizing
▪ Greenmail: Pushing companies to either change their
strategy to benefit stockholders, or charging a premium
for the stocks when the company wants to buy them
INTERNAL GOVERNANCE MECHANISMS
▪ Establish and implement a Code of Conduct/Ethics
▪ Strategic control systems – Formal target-setting,
measurement, and feedback systems
▪ Establish standards and targets against which
performance can be measured
▪ Create systems for measuring and monitoring
performance on a regular basis
▪ Compare actual performance against the established
▪ Evaluate results and take corrective action if necessary
INTERNAL GOVERNANCE MECHANISMS
▪ Employee incentives – Motivate employees to
achieve firm goals
▪ Goals may be financial, operational, or others such as
ethical behavior, the lack of which could cost the firm in
fines from regulators
▪ Examples of internal governance mechanisms
▪ Performance appraisal and promotion based on specific
firm objectives or operational goals
▪ Reward ethical behavior and tie to incentive
MEASURING CORPORATE SOCIAL PERFORMANCE
Social entrepreneurship is a concept in which a business is created with a
goal of bettering both business and society.
Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based company
rates companies on a number of stakeholder-related issues with the goal of
measuring corporate social performance (CSP), the degree to which a
company’s actions honor ethical values that respect individuals,
communities, and the natural environment.
KLD conducts ongoing research on social, governance, and environmental
performance metrics of publicly traded companies and reports such
statistics to institutional investors.
SMALL BUSINESS SPOTLIGHT: SOUTHERNECO: SAVING
THE PLANET, ONE JAR OF COOKING OIL AT A TIME
As an undergraduate student at Auburn
University, Clay McInnis developed a vision of
creating a biodiesel company in his hometown of
Montgomery, Alabama to supply fuel for his
family’s construction business.
He created SouthernEco LLC in 2009, operating
under a philosophy of “People, Planet, Profits,
Progress,” SouthernEco now sells biodiesel
machines to others in addition to creating
biodiesel for multiple construction companies.
Because of the success of his environmentally
friendly start-up, Clay has been featured on CNN,
and he was named one of BusinessWeek’s top
twenty-five young entrepreneurs for 2011.
Source: Photo courtesy of SouthernEco.
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