Opinion

Lucy P. Marcus

Facebook’s board needs more than Sheryl Sandberg

Lucy P. Marcus
Jun 26, 2012 13:09 EDT

When news emerged in May that Facebook had hired an executive search firm to look for a woman to add to its board of directors, I had hoped that with the appointment would come a great deal of diversity of thought and experience and an independent voice. Facebook has now announced that it has chosen its COO, Sheryl Sandberg, to join its board. Having Sandberg on the board is a good step, but does it address the larger shortcomings that are concerning Facebook users and investors?

Facebook has the same problems it had a month ago, and the company is still running counter to this year’s “Shareholder Spring” – a global movement toward transparency, engagement, and checks and balances on corporate boards. The newly public company lacks diversity of thought and international experience outside of the Silicon Valley bubble; and because Facebook is a controlled company, if the board takes issue with something, it doesn’t have the teeth to do much about it.

Sandberg may come on to the board with full voting rights, but her vote won’t count for much if a boardroom battle occurs, since Mark Zuckerberg holds more than 50 percent of the company’s voting shares.

As COO she may not be an independent board member, but one positive change from Sandberg’s appointment is that it brings another internal executive voice to the table. Sandberg is capable, speaks with authority and knowledge, knows Facebook inside and out, and has strong board experience. It will certainly be important that there is more than one executive voice in the boardroom.

Yet her appointment doesn’t address the wider issues that are still at play. If, as a user, you were unhappy with Facebook’s policies – be it privacy issues or inadequate information about changes to the site – or, as a stockholder, you were unhappy about a botched IPO and a lack of communication from Facebook during the weeks that followed, then Sandberg’s appointment to the board won’t make much of a difference to you.

What does Facebook still need if it is to fix these issues? It needs an outside independent director, preferably a woman with strong international experience who adds diversity of opinion, experience, skill, cultural background, and more. This is not a matter of optics – putting a woman on the board because it looks odd not to have one – but rather an issue of good governance.

The timing of the announcement is not coincidental: Wednesday, June 27, marks the end of the 40-day post-IPO quiet period, when analysts from the underwriting banks, including Morgan Stanley, Goldman Sachs, and JPMorgan, can begin offering up opinions on Facebook. Is adding Sandberg to the board going to be enough to counterbalance the concerns that investors and analysts have about the company? Unlikely.

PHOTO: Sheryl Sandberg, Facebook’s chief operating officer, speaks during Class Day ceremonies at Harvard Business School in Allston, Massachusetts, May 23, 2012. REUTERS/Brian Snyder

COMMENT

Lucy, you left out one not unlikely possibility.

Maybe there’s not a qualified woman out there who’s willing to work under the conditions that the rest of the board works. The board itself is “optics” and it’s surprising that anyone who one would want to serve on it would want to be in such a powerless role.

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Facebook versus the Shareholder Spring

Lucy P. Marcus
May 17, 2012 14:43 EDT

The corporate world is emerging from several weeks of boardroom turbulence dubbed the “Shareholder Spring.” In annual meeting after annual meeting around the world, boards have been taken to task by investors and other stakeholders on a wide range of issues: remuneration, board composition, competence, diversity, voting control, dual stock, and more. In the meantime, we have also witnessed the soap opera of Yahoo’s boardroom, the rebuke to newly public Groupon’s board for its lack of oversight of accounting practices, and the public condemnation of News International’s chair – and, by extension, its board – questioning his competence to lead the organization. No sector has been immune; no director has been untouchable.

Now Facebook is about to enter the public markets. Its defiant position regarding its old-style governance is in stark contrast with the temper of the Shareholder Spring. Facebook swims against the tide of a global movement toward transparency, engagement, and checks and balances. It feels as if we’ve all stepped into a time machine and none of the past couple of years of governance lessons – including the failures of boards in the banking-sector crisis – ever happened.

Several troubling issues call into question how this company can consider itself groundbreaking, innovative or new: the concentration of power in the hands of one man, the stranglehold on voting rights, the lack of diversity in the boardroom (which in a way is inconsequential, as the Facebook board does not have much bite anyway), and above all else the flagrant disregard of the lessons of the past several years about engaged, active and independent boards contributing to strong companies. Were Facebook striving to be an innovative company built to last, it would encourage healthy dialogue and diversity in the boardroom, and equal shareholder voting rights. It would not need to lock in power, but rather earn authority through excellent performance and results. The leadership would trust that a democratic boardroom would foster greater strength and stability than dictatorship, which brings a false sense of security. That’s a lesson we can take from the Arab Spring, where dictators thought that they held real control.

Today there is euphoria, anticipation and excitement among investors. A lot of people will make money in the short term, but short-term investing is not what builds strong businesses and strong economies. The world needs durable companies that are innovative in the products and services they sell, but also distinguish themselves through responsive and responsible conduct in their corporate governance structures and business practices.

Over the years Facebook will need to grapple with many issues that affect the development of the company and the lives of its users, from growth to innovating ahead of the curve, and from privacy to social responsibility. My hope is that Mark Zuckerberg begins to see the value of ceding some of the control he holds by rule and is able to trust that he will be able to earn that control through deed. If that doesn’t happen, all eyes will be on the investors to see if at least they have learned the lessons of bad governance and the value of good.

PHOTO: The Facebook profile of founder Mark Zuckerberg on a mobile phone is seen in this photo illustration, May 16, 2012. REUTERS/Valentin Flauraud

COMMENT

Most of the posters need to get over their emotions and focus on the concepts of corporate governance. This article is spot on. Mr. Zuckerberg should not have taken the company public if he is not willing to abide by basic standards of corporate governance. To be listed on an exchange requires a company, no matter how “cool” or “visionary”, to abide by rules and norms that ultimately benefit society.

Clearly, the fact that they “needed” to go public is as great an indicator of failure that I can imagine. IF they are really going to make money, there was utterly no need to go public. Private placement for future investment would have been trivial to line up. SELL…

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In the Boardroom with early-stage companies

Lucy P. Marcus
May 16, 2012 13:54 EDT

In this edition of “In the Boardroom with Lucy Marcus,” Lucy Marcus and Axel Threlfall are joined by the CEO of technology startup PeerIndex, Azeem Azhar, to talk about what the boards of early-stage companies should look like and do.

Early-stage companies anywhere in the world need to think about integrating good board principles from the start. If an entrepreneur plans to expand the business into a strong entity with real longevity, then it is more important than ever to get the foundations of that business right and build best practices into the very DNA of the company. One crucial area that will pay real dividends is ensuring that the company has a strong, committed, well-functioning board.

Even at an early stage, the discipline that comes with following the skeleton of corporate governance – having regular board meetings, putting together the documents for board meetings, having people around the table who ask challenging questions about both “grounding” and “stargazing” issues, and having independent, non-invested, non-aligned directors involved – sets important precedents for the future of fast-growth companies and helps build strong organizations for the long term. Boards composed of truly active, engaged and interested directors bring benefits, no matter the size of the organization.

In the Boardroom with the Shareholder Spring

Lucy P. Marcus
May 4, 2012 11:14 EDT

In this edition of “In the Boardroom with Lucy Marcus,” Axel Threlfall talks to Lucy about the “Shareholder Spring.”

If the past couple of weeks of annual general meetings (AGMs) around the world haven’t sent a strong signal to boards about the way investors and other stakeholders are feeling, it is hard to know what will.

Remuneration levels for CEOs and members of the C-suite have been a hot button issue for Barclays, AvivaUBS, Citigroup, AstraZeneca, Shell and other companies. In meeting after meeting, investors stood up to challenge remuneration committees about their decisions and decision-making process. Stakeholders also asked some pointed questions about corporate social responsibility. With Apple and Foxconn on their mind, they asked about a wide spectrum of areas from global working practices to wages to conflict minerals.

Board members ignore this shift at their own peril.

COMMENT

“60 Minutes” studied “Three Cups of Tea” and Jon Krakauer investigated it. In it, Mortensen said that he was lost and that he stumbled onto a village where he later built a school as he descended from climbing K2, but his porters dispute that he was lost and others said that he first visited the village a year after climbing K2.

From a review of the book on Amazon: “I read this book just a few weeks before the scandal broke. I loved the story and am glad to see children being educated. And yet some things just didn’t add up….

“International development is a challenge, and there is a long history of failure. The main problem is, how do you translate donor money into resources that get to the right people at the right time in the right form? It always seems like 90% is either wasted directly (mismanagement, bribes, etc.), or gets siphoned off to pay for things that aren’t used or not wanted. A lot of this is political: local leaders resist being upstaged and have their own priorities and face-saving motives, while the philanthropists insist upon doing it “our way” because “we know what’s best”.

“Three Cups of Tea makes it sound like Greg Mortenson has single-handedly solved these problems. Hence the questions that arose when I read the book. Could it really be that a village would be completely unanimous in support of new school, and with such universal, thumping excitement? There weren’t any political toes being stepped on? Was there really no suspiciousness or even apathy among the villagers? Would a villager really approach Mortenson to have a broken bone set (Mortenson is a nurse), when this sort of ‘technology-free medicine’ is exactly the sort of thing, like midwifery, that less developed cultures maintain quite a good grasp of? Given how hard it is to get a doctor to work in rural but accessible areas in N. America, how could teachers be recruited to work in these new schools in tiny villages, which take days to get to and where the local language is different? How could he know the schools were being built in the right place? Why would his Taliban abductors have had an 1979 issue of Time magazine on hand: why would it have been taken to backwoods Pakistan in the first place and why would it have been kept in storage for 20 years, until the chance kidnapping of an English-speaking American? Using only force of will, would an excitable taxi driver really have been able to singlehandedly get Mortenson moved to the front of the line for Mother Teresa’s casket visitation (by far the most preposterous anecdote in the book)?

“Basically, I concluded that the book is inspirational, but also a grand mix of political and circumstantial implausibilities. Originally I hoped this was mostly due to the publisher and co-author’s embellishment. However…

“Krakauer has just published a thorough 70-page challenge to Three Cups in a free PDF at the Byliner website, called ‘Three Cups of Deceit’. Many of Mortenson’s stories are challenged by about a dozen witnesses in Krakauer’s critique. What is remarkable is that aside from maybe one or two of them (Krakauer himself among them, who comes across as a bit snotty), the witnesses themselves have nothing to gain from telling their stories–they’re not going to get ratings, glory or money from telling their point of view.

“The story that emerges is sad. The testimony suggests that CAI’s funds are mismanaged by Mortenson, who spends too much money on himself and his book tour and publicity, and who resents the attempts of his American staff to evaluate what has worked and not worked in his overseas building projects. And that’s the crux of the problem: Mortenson is allegedly building schools that are in the wrong place, where no one will use them; when they are in the right place, Mortenson’s organization is not paying for teachers to staff the school.”

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Greg Mortenson’s lessons for non-profit boards

Lucy P. Marcus
Apr 13, 2012 12:31 EDT

Last year 60 Minutes and Jon Krakauer investigated Greg Mortenson, the executive director of the Central Asia Institute (CAI) and author of the best-selling, and, it seems, largely fabricated, Three Cups of Tea. They discovered that he had violated the trust of the people who donated money to the CAI and of those he was claiming to help. This past week Montana’s attorney general said Mortenson must repay $1 million to the CAI. He is allowed to remain with the charity, but can no longer serve as a board member, nor is he allowed to hold a position of financial responsibility.

This case offers some lessons about the role and responsibilities of boards of non-profits that are too important to ignore.

A good board can be hugely beneficial to the stability, growth and effectiveness of a non-profit. On the other hand, a bad or self-indulgent board can be a time-consuming distraction or a drag on scarce resources. In the worst cases, it can allow the abuse of funds and trust on a large scale, as seen with the CAI.

Non-profits come in all shapes and sizes. Some are small niche organizations that come from the passion of one or two people and have limited resources. Others are large, complex organizations with significant donations and operating costs that rival many global corporations. No matter the size or scope, the principles behind the board’s responsibilities are the same: Donors give money to an organization in the belief that their money will be used for a specific cause. The organization and the cause are at stake, and the ethical imperative behind the organization goes beyond the bottom line.

Non-profits require deliberate care and attention in building a strong, capable board, one that will ensure that the mission of the organization is honored in word and deed, and that the donated funds are used in responsible and careful ways. These boards have multiple “grounding and stargazing” responsibilities, from governance and oversight to fundraising and strategic planning. These responsibilities are made greater in challenging economic times.

Board seats of non-profits should be filled not simply by those who give the most money or even those who have the greatest passion for the organization or regard for the person running it. To do so discounts the seriousness of the role of a non-executive board member or trustee. A board should be carefully curated to ensure that the skills and abilities around the table will safeguard the health and well-being of the organization and its mission.

Who needs to be around the table and what skills should they have?

Governance

The board is about governance. It is about ensuring that the organization remains healthy, adheres to the mission and uses funds responsibly. Not every person who donates money, even sizable amounts, should automatically be given a seat at the board table. It is possible to honor donors and to value their input in places other than the governing board, including a separate advisory board.

Financial acumen

The board must have people who are financially astute and who understand the finances of the organization. Their role will include oversight functions, such as serving on the audit committee, as well as financial and strategic planning. The combination of financial oversight and planning is critical to a non-profit’s long-term strength.

Independence

Commonly overlooked is the value of genuinely independent board members. As with corporate boards, it is useful to have people who are neither donors nor beneficiaries and who bring true independence to the discussion and the oversight role of the board. One good choice for this role is an accountant who can serve as chair of the audit committee and in other oversight capacities.

Fundraising

Fundraising is a critical part of a non-profit’s existence. Having board members who take this role seriously is vital. However, a board member’s role is about more than fundraising, since the primary role of the board is governance and ensuring that raised funds are used as intended. Separate bodies can be created to ensure that there are enough people doing the necessary fundraising.

Relevant skills and abilities

A good board has members who have skills, abilities and knowledge relevant to the organization. This means that if the organization is building schools in Afghanistan, it needs board members who understand building, education and the country. These same board members can help bolster the skills and abilities within the organization. That often happens through mentoring and skills matching, where a board member is coupled with a full-time staff member to ensure that the organization has access to valuable, and sometimes costly, expertise, ranging from marketing to human resources.

Increasingly, public-sector responsibilities are being taken on by charities, especially as governments around the world are forced to cut back on services that they have provided in the past. As such, non-profits are touching the lives of more people every day. In the end, serving on a non-profit board is not about loyalty to the founder, personal agendas about the direction of the organization or the prestige that comes with sitting on the board. It is about ensuring that these non-profits are strong, capable organizations with integrity that honor those they are intended to help and those who have entrusted the money to fulfill their mission. Serving on these boards is about ensuring that organizations are sustainable and can help those in need for many years to come.

PHOTO: Greg Mortenson poses with Sitara “Star” schoolchildren in Wakhan, northeastern Afghanistan in this undated photograph released to Reuters, March 11, 2009. REUTERS/Central Asia Institute/Handout

COMMENT

As a teacher who used Three Cups of Tea in a reading group, I felt tremendously betrayed to learn that substantive parts of the book were fabricated. It’s not that certain events didn’t happen “exactly as he described”, but that they happened much, much differently and w/out the drama. (I’m thinking, specifically, of how Mortenson “discovered” Korphe.) Once I’ve been deceived by a person, I begin questioning everything else and so I question events in both of his books that I’ve read. Furthermore, I also now question Greg Mortenson’s motivation, no longer seeing it as the phenomenal altruistic endeavor I once saw it to be. Unfortunately, it seems possibly much more selfish and ego driven.

But the commentary is on non-profit boards, not Greg Mortenson. It’s well-written and, from my experience, has great insight and advice. Unfortunately, the non-profits I’ve been associated w/haven’t had the strength to pull together healthy boards like the one described. These are certainly levels to aspire to.

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How executive pay gets so out of control

Lucy P. Marcus
Apr 3, 2012 15:42 EDT

Boards are tone-deaf in a soundproof room

Why is it that executive pay continues to seem so out of line with what common sense would tell us is justified?

We’ve seen a number of striking examples over the past several months of compensation packages that, when exposed to the light of public scrutiny, evoke a range of negative reactions, making people anywhere from mildly annoyed to genuinely appalled. The packages seem out of line with results, and pay ratios are striking. Recent cases are unbounded by sector or location and include AstraZeneca, Barclays Bank and Shell. So what happens in the boardroom that lets such a package emerge?

In most board structures, a remunerations committee is assigned to set the level of compensation and determine the components of the pay package that senior executives receive, including base pay, bonus, stock and privileges such as use of the company jet. In recent years this committee assignment has gone from fairly light to as time-consuming as the audit committee.

There are several factors at play as the remunerations committee and the board as a whole try to weave together pay packages.

Compensation consultants. Often compensation consultants are used to help determine the packages of senior executives. Although many make a sincere attempt to prepare a comprehensive view, taking into consideration peer groups, market pressure, and many other factors, they may not fully appreciate how such a package will appear to stakeholders. What they advise may seem fair in the vacuum of the boardroom or on paper, but oftentimes it does not reflect other realities and pressures on the company from stakeholders such as investors, employees and the community at large. Also, there is a real danger that consultants can become part of the problem, driving up compensation packages as they create an aura of ensuring that the CEO and senior team feel fairly compensated relative to their peer group – a sort of “keeping up with the Joneses.”

Personal feelings. Directors may have developed personal relationships with the CEO and senior team and feel as if they must give them a certain compensation to “save face.” Or the directors may feel that the work the executives have done and are being asked to do in the future is onerous and must be compensated in a predetermined way – a way the board is accustomed to and feels reluctant to stray from. This can be a slippery slope, or rather a speedy escalator, as each year the desire to reward and inspire means that ever grander packages need to be put in place.

A disconnect from today’s reality. Those of us in the boardroom can often feel we are in a soundproof room. Even though we come armed with a great deal of knowledge and information, it is hard to factor in all the input from outside voices or truly take seriously some of those voices. The conversation around the table about compensation may sound reasonable in the vacuum of that room, where big numbers can be bandied about, but it is vital that directors have a finger on the pulse of the market and consider how the pay package, or severance package for that matter, will be received by the wider world. Board members who have been through this process often express surprise at the response by the public and had little appreciation or understanding of the impact their decision would have on the company’s reputation.

A lack of direct accountability. To date, most board members have done their work in a “black box,” so the decisions they made went fairly unscrutinized. Even if there was any outcry about the package, the issue was usually not linked back to the board. As such, there was little accountability for individual board members; they did not have to deal personally with any backlash that came as a result of unpopular choices.

This is changing rapidly. The perception and accountability of the boardroom, and indeed the personal accountability of individual board members, has been transformed. Increasingly board members have to demonstrate why they have taken certain decisions or voted in a certain way, and remuneration committees are being asked to substantiate their choices.

Boards need to come to grips with compensation structures of their senior executive teams, and stakeholders need to continue to voice their concerns about compensation packages. CEOs and other members of the C-suite deserve fair compensation for running companies, particularly in demanding economic times, when only organizations with the best talent will survive and thrive. On the other hand, these difficult economic times call for judicious decisions about compensation packages that are more clearly linked to performance and demonstrate that board members are not tone-deaf in a soundproof room.

PHOTO: A gambler counts out cash while making a proposition bet on Super Bowl XLV at the Las Vegas Hilton in Las Vegas, Nevada, January 27, 2011. REUTERS/Las Vegas Sun/Steve Marcus

COMMENT

I think we should revert to the wild west. In the old days, workers were ignorant of such things, but with the knowledge we have now about business, outcomes would be much different. Once we found out how much money was being made by our hard work, and how much the executives were being paid compared to us workers, we would all say “get a rope”. The people who work for the profit of the company should be paid dividends far greater than those who simply have the luxury of investing. Face the facts people, the rich have been screwing the poor since the beginning of time. Why? Greed, and because they can. Ask yourself who works harder for their money? The investor or the man risking his life, his family’s well being, his children’s education, and his family’s health, breaking his back drilling oil;working in the mine…etc.? Who deserves the most dividends for their efforts and risk? Who truly is risking the most?

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The secrets of winning startups

Lucy P. Marcus
Mar 29, 2012 11:30 EDT

In a video produced by The Wall Street Journal, Lucy Marcus explains what she looks for in a new startup and what makes some succeed where others fail.

Boards behaving badly

Lucy P. Marcus
Mar 29, 2012 10:40 EDT

COMMENT

Lucy,
Hi,
Great minds have purposes, others have wishes.. When I see, you and Sheryl Sandsburg ( FB), your work and approach to the tools of corporate conduct- its great.. but you both must read..if you please:BARBARA WOOTON; quote from her autobiography:” In A world I never made”….How she struggled for your likes!

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In the boardroom with Lucy Marcus

Lucy P. Marcus
Mar 15, 2012 10:29 EDT

In a new video, Lucy Marcus explains the basic functions and importance of boards of directors.

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