In what could be a defining moment in current US debates about corporate governance, the board of Meta, operators of Facebook and Instagram, has come under attack in a lawsuit for failing to consider the risks posed to society by their services.
Filed in the Delaware Chancery Court in the US, and naming (among others) Mark Zuckerberg, founder and chief executive of Meta, and Sheryl Sandberg, a board member and former chief operating officer, the lawsuit claims that Meta’s board presided over a governance structure concerned only with risk to the company self but not to society and, therefore, the interests of “diversified stockholders”.
The lawsuit, brought by James McRitchie, a Meta stockholder and editor of the long-established US website, CorpGov.net, says Meta failed to consider the outside world when it pursued a business model that exempted “high profile users” from rules preventing posts containing harmful material; ignored warnings and research pointing to Instagram’s harmful effects on mental health, in particular that of teenage girls; and knowingly used an algorithm that promoted conflict and “negative posting”.
McRitchie cites as evidence of these harms a series of articles run in The Wall Street Journal, based on information gained from Meta whistleblower Frances Haugen.
Called to account
Yet McRitchie’s focus remains on stocks. His contention is that these societal effects undermine stocks other than Meta’s and company directors have therefore failed in their fiduciary duties.
But the board is targeted for having guidelines and a structure that promotes a focus on short-term gains and not externalities, the lawsuit claims.
Citing guidelines for Meta’s audit and risk oversight committee, the lawsuit says it “shows the board has determined that company should monitor risks that human rights, community safety and other social issues pose to the company, its operations and strategies, but there is no independent mandate to monitor or mitigate the risks the company’s operations and strategies pose to human rights and community safety; no value is accorded to the risks these issues post to the global economy or diversified stockholders, unless they also pose risks to company enterprise value…”.
Meta’s dual class share structure and insistence that board members hold shares has only amplified its drive for short-term results, the lawsuit claims.
The court action will be another blow to Zuckerberg, who has faced a wave of criticism in the past over Facebook’s business activities.
Going for woke
But McRitchie’s lawsuit also reflects one side of an increasingly bitter US debate over the purpose of companies. On one side are ranged those who argue governance should be aimed at the interests of all stakeholders; against them are those, including a number of Republican politicians, who claim business has become illegitimately involved in “woke” politics.
McRitchie tells the finance website MorningStar that his own stock holdings depend on a “healthy economy”.
“It’s important that the companies I own,” he says, “not engage in practices that threaten the financial return of my entire portfolio.”
If McRitchie highlights one thing, it may be the claim made by Harvard researchers that companies have boasted about their stakeholder credentials, but have done little in practice to live their claims.
The lawsuit also underlines another developing idea: healthy societies are good for business. Companies and their activities do not exist in a vacuum. This may be harder for the anti-woke critic to target, but they will likely have a go.