I’ve been involved in several antitrust actions and researched many others. Generally, the sequence of events is that the firm grows to a point where competition no longer keeps it constrained. It discovers that misusing power is far easier than competing fairly. It gets caught misbehaving and crippled by regulations. Historically, this last step has either wiped out the firm’s power or killed it outright. Standard Oil is a shadow of what it once was, RCA is gone, AT&T is a different company, IBM isn’t the power they once were, but Microsoft is in better shape than they were, though they no longer have the browser dominance they once had.
Facebook is now facing its unique challenge and has belatedly responded with a well-staffed oversight board, but I think it will fail. However, I also think it points the way to solving the problem for other fast-growing companies that could become dominant but don’t want to run afoul of governments.
Ethics
Ethics needs to be built into a company at the front end and continuously reinforced. IBM had that as part of their DNA and maintained that center as long as Watson led the firm. They did have some issues during WWII with Germany, but generally, they didn’t see the kinds of issues that firms like Standard Oil and RCA had until much later.
However, to make ethics work, you have to make sure the firm’s business model aligns naturally with ethical behavior. Microsoft got into trouble by excessively focusing on revenues and then breaking the rules to achieve or maintain dominance. Their successful fix was to shift emphasis to customer loyalty and satisfaction, which drove them to the Open Source and Cloud powerhouse they are today. This change doesn’t mean they won’t have ethical issues in the future, but their business model no longer drives unethical behavior. Microsoft emerged in 2011 in far better shape than going into the process.
Facebook has a far more significant problem because their business model is virtually institutionalized theft. Their users and revenue are separate, and their revenue largely derives from mining users for their time and personal information. It is built on the model where users have no idea what their information and time are worth, so they give it to Facebook, who then effectively resells that time and personal information. There is no equity in Facebook’s model, which drives the firm to misbehave rather than prevent it.
Oversight Board
The board Facebook put in place came after Facebook’s bad behavior was discovered, limiting its impact. Unlike the Microsoft remedy, where the Oversight was tied to the U.S. legal system and thus had the authority to drive change, Facebook does not limit its power and potential. Besides, Facebook’s business model is inherently theft, which means the one thing the board would need to fix that model is outside the Oversight Board’s authority. So, the Oversight Board can’t address the core cause of Facebook’s problem, only the symptoms. Given Facebook’s massive scale, the board is ill-equipped to deal with all of those symptoms.
The trick with any form of Oversight is to make sure it has the authority it needs, is staffed with people who understand the broad market that the firm is involved in and the it’s internal workings, and to survive internal politics. This is because the board will frequently come into conflict with influential executives that either want to restaff or eliminate it to significantly reduce or remove it as an impediment to what the executive wants to do.
Those executives won’t see the Oversight Board as a company asset but a liability, and if they hamper the board effectively, board members are likely to become Whistleblowers. If that happens, the Oversight Board becomes an apparent liability and is likely to be disbanded or restaffed. This is not to address Facebook’s ethical problems better, but to remove the board as an obstacle.
If Facebook’s problem is their business model, the only way to fix that problem is to change the model. One way would be to compensate the users for their information and participation—another would be to shift the fee structure to where the users paid and then were reimbursed for their contributions.
Wrapping Up
When dealing with a complex problem, the first step is to break down the problem into its parts and then craft a solution against that analysis. That wasn’t done with Facebook’s Oversight Board, and thus the solution, which could work, is more likely not to. But the critical lesson here is that power does corrupt, and if a firm wants to avoid government penalties and Oversight, it has to self-regulate from the start.
This inherent corruption means that the business practices and model needs to reward ethical behavior. Hiring needs to prioritize those with empathy and who are ethical by nature. It’s typically not your highest-performing folks who game systems to get their scores. Also, the firm needs to accept responsibility for its actions organizationally.
Those elements don’t yet appear to be present in Facebook’s remedy, and governments tend not to apply remedies surgically but catastrophically, with Microsoft being one of the few exceptions. It is also one of the latest remedies, which does suggest that Facebook could survive this. But why go through it in the first place? In the end, firms should grasp the difference between having the power to do something and what is right and wrong. Fighting the corruption of power should be a far higher priority than avoiding the kinds of issues now facing firms like Facebook, Google, Amazon, and Apple.
