What will happen to Facebook Inc. after a former employee testified in the U.S. Senate about the social-media company repeatedly putting profit ahead of its users?
Well, probably not much. Executives and directors at publicly traded companies are expected to place the creation of shareholder value, or profit, at the top of their list as part of their fiduciary duty to investors. As is often seen in these types of controversies, it would not be the actions by executives that produce recriminations, but the lies they tell to cover up those actions.
Former Facebook FB, +2.06% product manager Frances Haugen told a Senate Subcommittee on Consumer Protection, Product Safety, and Data Security on Tuesday that the social-media giant has lied to investors and the public about its practices, and that would be actionable.
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“The documents I have provided prove that Facebook has repeatedly misled us about what its own research reveals about the safety of children, its role in spreading hateful and polarizing messages, and so much more,” Haugen said in her testimony on Capitol Hill.
Haugen was the main source of documents in The Wall Street Journal‘s recent investigation, The Facebook Files, and her identity was unveiled when she spoke with “60 Minutes” for a piece that aired Sunday night before testifying to senators Tuesday. The coordinated rollout coincided with an unprecedented six-hour outage of Facebook’s services on Monday, as well as the biggest drop in its stock in nearly a year.
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Facebook, and its investors, should be concerned about the fallout. Haugen has filed several complaints to the Securities and Exchange Commission, outlining many of the company’s misleading statements in its previous congressional testimony and in conference calls with investors, including “how it misled investors about its role in perpetuating misinformation and violent extremism relating to the 2020 presidential election and the Jan. 6 insurrection.”
Stephen Diamond, an associate professor of law at Santa Clara University, said that Haugen’s submission should trigger an investigation by the SEC as to whether or not Facebook has made misleading statements or omitted material information to investors.
“The real question is whether or not Facebook has been disclosing a balanced picture of the impact of this kind of activity to their investors,” he said.
Senators appeared to be preparing to ask Facebook exactly that, with some reportedly suggesting an invitation to CEO Mark Zuckerberg is coming next, after an underwhelming performance last week by Antigone Davis, a lesser Facebook executive who is the head of global safety, in front of the same committee.
Instead of seeking to justify its actions, Facebook attacked the messenger Tuesday. A Facebook executive referred to the information Haugen supplied to authorities and the media as “stolen” in a television interview, and the company issued a statement that sought to discredit Haugen, noting she worked at the company for less than two years, had no direct reports and did not participate in C-level executive meetings.
“We don’t agree with her characterization of the many issues she testified about,” Lena Pietsch, director of policy communications, said in a statement.
That type of response is not going to play well. Haugen was commended by many senators during the hearing for her bravery in coming forward, and she has been roundly compared with Jeffrey Wigand, a former tobacco industry executive who blew the whistle on that industry’s manipulation of data on the addictive nature of nicotine and the harms of smoking cigarettes.
If Facebook continues to go after a whistleblower and attempts to evade the larger questions about its actions, it would only prompt lawmakers to make more dramatic actions. Haugen’s testimony, for instance, could lead to some real reform of Section 230, the law created in 1996 that shields internet platform companies that publish third party content from litigation. Congress has been dithering for the last two years on taking any action, as was noted by Sen. Amy Klobuchar (D., Minn.) during the hearing.
“The time for action is now,” she said.
Earlier this year, Rep. Tom Malinowski (D., N.J.) and Rep. Anna G. Eshoo (D., Calif.) reintroduced the Protecting Americans from Dangerous Algorithms Act, legislation to hold large social-media platforms accountable for their algorithmic amplification of harmful, radicalizing content that leads to offline violence. The bill would remove the liability immunity for a platform if its algorithms amplify content related to interfering with civil rights and involving acts of international terrorism. The previous version of this bill was introduced a year ago and withered in Congress.
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Facebook could see more ramifications beyond an SEC investigation and recharged legislators looking to establish new guidelines for the internet. Shareholders could be next, with class-action lawsuits alleging statements that were misleading to investors. Diamond also noted that criminal liability could be another potential issue, if an SEC investigation finds there were willful violations of securities laws.
The past few years have produced wave after wave of negative news about Facebook, but nothing has struck to the company, which was worth $1 trillion in market value as recently as two weeks ago. Investors who have held on to the stock throughout the controversies should realize that this time, the company’s Teflon shield may finally be cracking.
“There is momentum here that suggests Facebook has some serious issues,” Diamond said.
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