In 2014, a shareholder derivative suit was filed in the Delaware Courts alleging
ID: 414924 • Letter: I
Question
In 2014, a shareholder derivative suit was filed in the Delaware Courts alleging that the Facebook Board of Directors violated their duties to their shareholders by pay- ing its nonexecutive directors 43% more than “peers,” despite its net income and revenues being 66% and 49% lower, respectively, than its peers. The peers named in the suit included Adobe, Amazon, Cisco, eBay, EMC, LinkedIn, Netflix, Qualcomm, SAP AG, The Walt Disney Company, VMware, and Yahoo!, Inc. The suit noted that in 2013, the Facebook Board paid its nonexec- utive members an average $461,000 per director, 43%, or $140,000 higher than the average per director compen- sation in Facebook’s Peer Group. It further noted that the Board is free to grant its board members an unlimited amount of stock as part of their annual compensation under a 2012 equity incentive plan, with the only limit a $2.5 million share limit per director in a single year (worth approximately $145 million at the time of filing). The Facebook Board at the time consisted of eight individuals, six of whom were “outside” (i.e., nonem- ployee) directors 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. The lawsuit alleged that all of the Directors approved the compensation and all of the nonexecutive directors received the compensation. The lawsuit claimed breach of fiduciary duty, waste of corporate assets, and “unjust enrichment.” The issue of director compensation accelerated in late 2014, when Jan Koum, Whats App cofounder and CEO, joined the board and received a salary of $1, but stock awards worth over $1.9 billion, representing a sign-on award of $25 million restricted stock units when Facebook acquired Whaz App. However, Face- book CEO Mark Zuckerberg allegedly approved the stock grants in a written affidavit, rather than at a stock- holder meeting—and with 60% of the voting power, he had the ability to approve whatever he wanted. The question remains as to whether Mark Zuckerberg failed to comply with Delaware corporate law, where the com- pany is incorporated, in circumventing shareholders by signing off on directors’ stock grants instead of present- ing it at a shareholders’ meetin
1. Do you believe that directors should be able to approve their own level of compensation without approval by a shareholder vote? Why?
2. Did Zuckerberg break the law by not bringing up the compensation at a shareholder meeting? Was his silence ethical behavior?
3. What is an appropriate level of director pay? Is the compensation given to Facebook directors excessive?
4. What are the duties and responsibilities of corporate directors? Do these duties/responsibilities justify high levels of pay?
5. Research Facebook CEO Mark Zuckerberg. Are his actions as CEO always ethical and moral? Are there any ethical issues with the policies and activities of Facebook?
Explanation / Answer
Answer1: No, we believe that directors should not be able to approve their own level of compensation without approval by a shareholder vote. Because the directors can approve the compensation for the CEO or other senior management employee but they cannot approve the compensation for them. It is the case of not meeting the basic guideline of compensation approve. Generally the compensation needs to be approve by the superior authority along with HR director.
Answer 2: No, Zuckerberg not broke the law by not bringing up the compensation at a shareholder meeting. Because compensation needs to be reviewed in annual general meeting with share holders. The silence was not an ethical behavior. He needs to explain properly that the compensation will be brought for review in the annual general meeting with board of directors.
Answer 3: The appropriate level of director pay needs to be a reasonable pay for the directors, which can be similar to the pay of other directors in other similar organizations. In general way, the pay of directors supposed to be the median of the pay of directors, in the similar market, for the similar business application, with relevant experience. Yes, the compensation given to Face book directors was excessive. The compensation needs to be reasonable and logical with adequate supporting and background investigation and analysis.
Answer 4: The duties and responsibilities of corporate directors is as below -
They do eligible for higher pay, but the higher pay needs to be reasonable and logical with respect the market conditions and organization status.
Answer 5: Face book CEO Mark Zuckerberg’s actions as CEO are always ethical and moral. He drives the ethical behavior among the employees and through the Face book system. No, there are not any ethical issues with the policies and activities of Facebook. We did not observed or heart of unethical issues with the policies and activities of face book.
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