Posted: February 21st, 2023

Ethics In Practice Case Facebook and Say on Pay for Directors? In 2014, a shareh

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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 of
Delaware Courts alleging that the Facebook Board of Directors violated
their duties to their shareholders by paying its nonexecutive directors
an average $461,000 per director, which was 43 percent more than peers
like Adobe, Amazon, Cisco, eBay, and Yahoo!, among others. The lawsuit,
Espinoza v. Zuckerberg, further noted that the Facebook Board granted
its board members an unlimited amount of stock as part of their annual
compensation, with the only limit being a $2.5 million share limit per
director in a single year (worth approximately $145 million at the time
of filing). The lawsuit claimed breach of fiduciary duty, waste of
corporate assets, and “unjust enrichment.” The issue accelerated in late
2014, when Jan Koum, WhatsApp cofounder and CEO, joined the board and
received a salary of $1 but stock awards worth over $1.9 billion when
Facebook acquired WhatsApp.
The Facebook Board at the time consisted of eight individuals, six of
whom were “outside” (i.e., nonemployee) directors who benefited from
the compensation plan, including Lead Independent Director Donald Graham
and Directors Peter Thiel, Marc Andreessen, Reed Hastings, Erskine
Boles and Desmond-Hellman. Inside directors included founder and
CEO/Chairman Mark Zuckerberg and COO Sheryl Sandberg. Zuckerberg, who
had 60 percent of the voting power, allegedly approved the stock grants
in a written affidavit, rather than at a stockholder meeting—thereby
circumventing shareholders by signing off on directors’ stock grants
instead of presenting it at a shareholders’ meeting.
Facebook ended up settling the lawsuit—agreeing to submit its
non-employee director compensation program to shareholder vote in the
future. However, the vote of Facebook’s shareholders was a mere
formality, as Mr. Zuckerberg held voting control of Facebook’s shares.
Nevertheless, the lawsuit brought up issues of Say on Pay—this time for
not just company executives but also for company directors.
Should directors have the right to approve their own
compensation without taking it to shareholder vote? Please justify your
answer and explain what might or might not warrant this.
Did Zuckerberg break the law by not bringing the compensation issue up in a stockholder meeting?
What is an appropriate level of director pay? Is the
proposed compensation in the Facebook situation excessive? How might
this be determined?
Institutional Shareholder Services, a proxy advisory
firm, has noted that there is “too much work and too much time”
required of directors; could this justify higher director pay?

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