Meta under Shareholder Scrutiny for Metaverse Risks

Investors in technology companies are growing increasingly anxious that the boards of their investments are acting as appropriate stewards of their capital. Not just in pursuing capital growth which the technology industry has been historically very good at, but also in their wider alignment to environmental sustainability, social justice, and corporate governance (ESG) goals. The recent shareholder proposal from Arjuna Capital et al, detailed objection (pages 2-5) by Meta’s lawyers, and SEC ruling are evidence that there is a significant governance problem at companies like Meta Platforms, Inc. which shareholders want resolved. 

Firstly, a word on why this matters: 

Meta’s share price is about half that of what it was when it was still trading as Facebook in early September. The loss in value is equivalent to about the GDP of countries such as Austria, Belgium or Norway. It’s been a sh***y ride for the portfolio managers who’ve resolutely held this stock. 

And why has this slide in value happened? Broadly because of a single reason – shareholders see the risks in governance outweighing the potential upside. And this is a critical point to underscore. The opportunities the metaverse affords are massive – this is a commercial opportunity potentially the size of Cloud and mobile markets combined, and so investors’ concerns that the company management’s past performance is an indication of an inadequacy to live up to the governance demands that this opportunity creates.

As we all know, Facebook did a big rebrand to “Meta” in October 2021. The world of VR/ AR has suffered from being perceived as a little too geeky, and so adopting a meme term such as ‘metaverse’ to evoke the immersive online experience behind Zuckerberg’s vision might seem astute, were it not for the fact that the name ‘metaverse’ as originally coined by Neal Stephenson, describes a dystopian destination for technology in our near future. I’ve often thought of it as a little like Exxon Mobil creating a clean-energy strategy and calling it the “Venus” project (referring to a planet with a runaway greenhouse effect that has created such atmospheric catastrophe that anything descending from orbit will literally be crushed out of existence). Let’s all hope Mark and not Neal has the last laugh on this one.

Zuck has been bullish on the metaverse strategy, mostly because it’s helped him deflect a lot of the criticism that’s been directed towards him from the significant issues caused to society by Facebook. In case you’ve missed the headlines, Facebook (together with its sister platforms, Instagram and Whatsapp) are alleged to be culpable for genocide, a coup attempt on the US Capitol, electoral interference, and making teenage girls depressive. Yet its mission is benign: “To give people the power to share and make the world more open and connected”. It’s enabled families to remain connected through the pandemic, helped small-businesses reach new markets for their products, and become the most popular source of news and current affairs information by the majority of its users. Is this a price worth paying for the odd mass-killing, revolution, democratic undermining or teen suicide? I know where I stand on that equation. 

You see, the challenge that Meta has is that it has recognised the need for governance and controls only after the harms it has caused. In its defence, in the case of the metaverse project, Zuck has been upfront in admitting that it requires “new forms of governance”. I tend not to agree with his assertion. I’m certain there is little about the metaverse that truly requires new forms of governance; rather we have many hundreds of years of governance of technological innovation that we could and should be drawing upon in order to ensure that we don’t sleep-walk into the dystopian future that Stephenson warned us about in his Snow Crash novel. But talking about “new forms” of governance is a great way to give yourself licence to conduct a navel-gazing exercise, and create fodder for the small army of lobbyists to confuse lawmakers and regulators sufficiently to tie any governance enforcement up in knots for years to come.

So, if not new forms of governance, then what existing governance should we be expecting BigTech firms like Meta to be adopting? Well, I’ll cite just two examples here – and these are the biggies:

The first is a high standard of ESG disclosure. This doesn’t mean endless reporting on ‘tech-for-good’ initiatives or waxing lyrical about the number of solar panels on the roof of the data centre. No- high quality ESG demands that stakeholders are identified and prioritised, their concerns and goals understood, a strategy to execute on the commonality of those goals and mitigate the concerns are delivered, and disclosure on how the thorny issue of conflicts and the protocols for managing them with real examples communicated. Facebook has in fact already developed a world-class example of what I describe: and it’s spent $120 million on developing it. It’s called the Oversight Board, but with a mandate so narrowly focused on content moderation, they’ve missed the opportunity to solve their ESG problem, and their reputational challenges with it. No new forms of Governance, Mark – just expand the scope of what you’ve already built.

The second is likely a derivative of what would happen if Facebook’s Oversight Board were given a say across the whole of their business operations across all of their business units (to include the metaverse project). You see, my central challenge to Whatsapp, Instagram, Facebook, and the future Zuck-orientated metaverse is that they are each ‘too big to fail’. The same problem exists towards other tech companies too, notably Google, Amazon and Twitter. As the shareholders of Lehman Brothers discovered to their great misfortune, when an organisation plays such a systemically crucial role in an industry, it actually limits the options for rescue when the proverbial hits the fan. Many commentators have written about the extreme inequity that the benefits of banking accrue to the few, but the costs of it accrue to all of us – but few have made the same allegation to the tech industry. But surely it’s clear that if one man (and sadly it is a man in both the case of Twitter and Whatsapp) has the power to pull the plug on the most important (i.e. ubiquitous) communications platforms, then we’re in a very dangerous place. That’s why Musk’s takeover of Twitter also concerns me so greatly.

The answer? Not to opensource the algorithms like Musk has proposed with Twitter, but to opensource the protocols. Facebook (and the other Meta platforms) could be open protocols spawning an ecosystem of innovative alternatives much as how the openness of the world-wide-web has spawned millions of websites, some large, some small – but with no central control, and with enormous commercial value being created.

But the shareholder activist group lead by Arjuna Capital hasn’t called for Meta to be broken up, far from it – it’s made a simple request to management that they commission a report into the potential harms that the metaverse might create, and with policy suggestions of how these might be mitigated. Their proposal speaks to the enormity of the potential risks, and makes an impassioned plea to the SEC that allowing Meta to embark on this strategic move without such scrutiny would be enormously damaging to society.

Meta’s lawyer’s response? Well, that the metaverse is just a new product iteration just like a change in McDonald’s menu or a revised product line up by Eli Lilly. Nothing to see here, move along quietly.

The SEC have seen right through this, and ruled in the shareholders’ favour. In the next few weeks the proposal will be put to vote, and Meta will likely be forced to publicly release a report on the ‘new forms of governance’ that their bold strategy demands.

Perhaps nothing will change, but this story has certainly emboldened investors further that action on ESG matters towards BigTech is not only their prerogative, but their duty – and one which regulators such as the SEC are supportive of.