Ethics In Practice Case Facebook and Say on Pay for Directors?

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Ethics In Practice Case Facebook and Say on Pay for Directors?

In 2014, a shareholder derivative suit was filed in the State ofDelaware Courts alleging that the Facebook Board of Directors violatedtheir duties to their shareholders by paying its nonexecutive directorsan average $461,000 per director, which was 43 percent more than peerslike Adobe, Amazon, Cisco, eBay, and Yahoo!, among others. The lawsuit,Espinoza v. Zuckerberg, further noted that the Facebook Board grantedits board members an unlimited amount of stock as part of their annualcompensation, with the only limit being a $2.5 million share limit perdirector in a single year (worth approximately $145 million at the timeof filing). The lawsuit claimed breach of fiduciary duty, waste ofcorporate assets, and “unjust enrichment.� The issue accelerated in late2014, when Jan Koum, WhatsApp cofounder and CEO, joined the board andreceived a salary of $1 but stock awards worth over $1.9 billion whenFacebook acquired WhatsApp.

The Facebook Board at the time consisted of eight individuals, six ofwhom were “outside� (i.e., nonemployee) directors who benefited fromthe compensation plan, including Lead Independent Director Donald Grahamand Directors Peter Thiel, Marc Andreessen, Reed Hastings, ErskineBoles and Desmond-Hellman. Inside directors included founder andCEO/Chairman Mark Zuckerberg and COO Sheryl Sandberg. Zuckerberg, whohad 60 percent of the voting power, allegedly approved the stock grantsin a written affidavit, rather than at a stockholder meeting—therebycircumventing shareholders by signing off on directors’ stock grantsinstead of presenting it at a shareholders’ meeting.

Facebook ended up settling the lawsuit—agreeing to submit itsnon-employee director compensation program to shareholder vote in thefuture. However, the vote of Facebook’s shareholders was a mereformality, as Mr. Zuckerberg held voting control of Facebook’s shares.Nevertheless, the lawsuit brought up issues of Say on Pay—this time fornot just company executives but also for company directors.

1. Should directors have the right to approve their owncompensation without taking it to shareholder vote? Please justify youranswer and explain what might or might not warrant this.
2. Did Zuckerberg break the law by not bringing the compensation issue up in a stockholder meeting?
3. What is an appropriate level of director pay? Is theproposed compensation in the Facebook situation excessive? How mightthis be determined?
4. Institutional Shareholder Services, a proxy advisoryfirm, has noted that there is “too much work and too much time�required of directors; could this justify higher director pay?