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RESEARCH REPORT Assessment Task – Governance Research Essay Lecturer: Phuc DG Ethics and Governance – BUSM4403 Group (9.00 A.M Saturday) Le Ngoc Anh – s3762228 Table of Contents I Introduction II Literature Review Corporate Social Responsibility (CSR) 2 Corporate Governance (CG) 3 Innovation and Sustainability III Methodology .5 IV Discussion The existing corporate governance model of Meta Inc Ownership Structure Board of Directors (BOD) Board Committees .9 Remuneration .10 Innovation and sustainability perspective 12 Implications of CG model 13 V Recommendation 14 VI Conclusion 16 VII Reference 16 I Introduction In the technology-driven economy, a large number of firms operate as platforms as the adaption of the advanced technologies and the fast-moving consumer demand in this hyper-competitive global market This has put increasing pressure for all established firms to undergo this transformation However, the traditional corporate governance as the product of the hierarchy corporate structure highlighting the primacy of shareholders is failing the platforms and making less sense in the innovation-driven economy Thus, there is a disconnection between the requirements for being successful in the age of platforms and the current regulatory framework, which raises the demand for platform governance The purpose of this research report is to analyze the current corporate governance model of Meta Inc, examine and suggest the model in the way that facilitates innovation and sustainability This paper comprises main parts: literature review, analysis and recommendation II Literature Review Corporate Social Responsibility (CSR) In today's business environment, CSR is gaining more significance and plays an important role in defining organizational ethics and responsibility for their impacts on environment and society (Gyorgy et al 2008, European Commission 2019) CSR practice is applied popularly in many companies as a way to communicate to their stakeholders about the social performance, which help firms build its positive organizational image (Douglas et al 2004) and become policies that go beyond the stakeholders’ concerns and the financial performance (Glavas & Aguinis 2017) Supported by William & Seigal (2010), CSR is used as the strategy for enhancing the companies’ reputation, resulting in consumer loyalty and increased profitability Although CSR is not compulsory by which firms can contribute voluntarily to better environment and society (European Communities Commission n.d.), CSR is argued to go beyond voluntary action and is an aspect of the interface between society and organization, thus requiring regulations for improving firm performance through CSR (Brammer et al 2012) More importantly, there have been different hypotheses of various scholars to CSR including the skeptical view toward CSR and those adopting that theory to firm’s social responsibilities in a broader scope Particularly, Milton Friedman’s theory viewed CSR as an improper use of company resources resulting in unreasonable expenditure for the general societal interest (Thomas 1993, Edafe 2021) As according to his perspective, the ultimate goal of the business is merely maximizing the profit, thus CSR is referred as window dressing for businesses (Mauricio et al 2019) Some have agreed with Friedman that the underlying objective of companies that drives everything they is to maximize the interest of shareholders (Edafe 2021) By contrast, a large number of scholars disagree with Friedman’s perspective as more and more corporations shifted their focus towards activities that primarily create value to the society Notably, the theory of Carroll emphasizes that a corporation needs to have main responsibilities including economic, legal, ethical, philanthropic responsibilities to be socially responsible in a balanced way (Carroll 1979) Also, Freeman’s theory or the stakeholder theory as the most famous one has argued for Friedman that the companies have to include their stakeholders in the corporate activities as an effective and constructive way for them to meet the expectations of society (Edafe 2021, Freeman & Dmytriyev 2017) In his view, the stakeholders are the owners of the corporation as they can affect and be affected by the achievement of the organization’s purpose (Freeman & Dmytriyev 2017) Conversely, shareholders are not the owners as there is only the contractual liability between them and the corporate based on the nature of law Therefore, conflicting with Friedman’s theory, the stakeholder theory highlights the stakeholders’ engagement in the CSR performance rather than the shareholders However, a weakness from Freeman’s theory is that it takes into account the large number of stakeholders with the limited resources of corporations, which is not realistic and practical in real life The research of Mitchell, Agle & Wood 1997 solved that gap and supported Freeman by helping identify the stakeholders of corporations by attributes including Power, Legitimacy, and Urgency The more attributes they have, the more priority the company should put for this party Corporate Governance (CG) The necessity of CG emerges in modern corporations due to the separation of ownership and control issue as one of the corporate characteristics (Humera 2011) CG, in particular, is a mechanism resolving the principal-agent problem as the conflict of interest between stakeholders who own the business and directors and managers who run the business (OECD 1999) As there is no single CG definition, it could be viewed from different perspectives Therefore, different theories were developed regarding CG to improve its model Firstly, the Agency theory is concerned with the relationships between principals as shareholders and agents as the management team (McColgan 2001) From that theory, the interests of shareholders must be served and protected by the agents; also, due to the information asymmetries, the agents or managers always have the opportunistic attitude which could lead to behaviors if not control them (Jensen & Meckling 1976, McColgan 2001) Thus, the board must be designed to be a strong independent one with more outsiders or independent non-executives, and a separate role of CEO and Board chairman (Porta, Silanes & Shliefer 2002) However, the stewardship theory claims that companies need to give managers more power and motivation rather than controlling, monitoring them (Glinkowska & Kaczmarek 2015) As that theory considers managers as the stewards or guardians of the company who help firms overcome the crisis or scandal and not just work for the profits but for achievements or anything else In that view, the board is designed in a way that has more managers than outsiders and also the role duality (Oliver 1995) Moreover, the Agency theory above is argued by the stakeholder theory that the interest of the whole stakeholders must be included and cared for as they are genuine owners rather than only serving for the interest of small groups as shareholders (Oliver 1995) Therefore, the board is designed in the same way with the agency theory’s implication; however, the members of the board are almost all stakeholders to reflect their interest in the board Innovation and Sustainability In the digital era and technology-driven economy, the rapid technological growth and the fastmoving demand of consumers have exerted strong pressure for all companies operating in the highly competitive global marketplace to innovate, and the proliferation of platforms was seen as the adaptation of this new environment (Fenwick et al 2019) In the world of platform, all companies must undergo this transformation, innovate and reinvent as platforms, specifically upgrade capacity for disruptive innovation, which helps achieve sustainable development and ensure to remain relevant in the long-term; otherwise, those firms are destroyed by the current platforms which would continue scaling up into new industries and markets (Fenwick et al 2019) III Methodology This paper uses different theories related to the topic of CSR and CG including the theory of Friedman, Stakeholders, Agency and those of the internal means of CG Also, a range of reliable academic resources has been collected to further analyse and prove those theories of various scholars Furthermore, Analytical and Qualitative Research techniques are used in that paper for better understanding the aspect of innovation and sustainability, its impact on the CG model, evaluating and analyzing the current CG model of Meta Inc Those approaches are proper and well-served for deeply analyzing, evaluating the model of CG and suggesting recommendations as the primary goal of the research report IV Discussion The existing corporate governance model of Meta Inc The company is implied to follow the Agency theory to design its CG model As its established governance mechanism focuses much on controlling, monitoring the Management team, it sets clear legal sanctions of violating the rules while giving them incentives to buy their loyalty Also, with the total of about 23 board members constituted by a large number of independent nonexecutive, this strong and independent board as having more outsiders to control is similar to the implication of the Agency theory However, the company did not follow the second implication of the theories as still having the role duality when the position of CEO and chairman is held by Mark Zuckerberg only Based on the theory highlighting the oversight for the Management team, the chairman would not control the CEO as being the same person, thus the CEO has full power to control the business and he would operate free from restraint The risk of role duality could happen when the extremely powerful CEO having a strong influence on the board could abuse the power, produce unethical behaviors and negatively affect the company Generally, closely applying Agency theory would help the company increase its CG’s effectiveness in controlling and monitoring the Management team, preventing their opportunistic behaviors and the possible conflict of interest, solving the issue of information asymmetries, improving their performance and maximizing the benefits of the shareholders (Livia & Sardar 2005) However, following strictly to that theory would render the firm just focus on maximizing the profits and ignoring the negative impact to the customers and employees, which could result in unethical behaviors The scandal of Enron as having unethical misconduct has been proved for the limitation of strictly following that theory (Brian 2005) Ownership Structure From the identified theory that Meta follows in designing, its existing CG model would be then analyzed deeply with the internal means Firstly, the company is recognized to have the concentrated ownership structure It can be seen from the data below that stockholders of Meta holding 7.30% and 5.12% respectively, are defined as the blockholders according to the law and CG theories as holding more than 5% of share (CNN Business n.d.) With this concentrated ownership structure, it helps the company reduce the principal-agent problem The case study conducted in 927 listed firms having that type of ownership has found that abusing the rights and interest of shareholders or the opportunistic behaviors that could be done by the managers rarely happen in almost all companies (Zhang 2004), as the blockholders who having large portion of shares would try to control the company for their own interest and they not let the agents or managers run the business themselves Like the case of Tesla, as the blockholder, Elon Musk not just sits on the board to control the directors but he also becomes the senior manager to run the business by himself By trying to have a strong influence on the business, the issue of free rider or agency problems could be eliminated, and prevent the managers from having opportunistic behaviors Also, the strong commitment of shareholders, high-level of their loyalty are found in this type of ownership, and the long-term strategies are developed due to the alignment of interest, as the blockholders would try their best to care for and protect the business (Zhang 2004) On the other hand, the issue of principal-principal or the conflict between small shareholders and blockholders could be arised, as the big shareholders would try to maximize their own interest when running the business and making the decisions Therefore, small shareholders who are affected much by the big shareholders' decisions would be extremely risky as they would lose their interest and benefits Figure 1: Top 10 Owners of Meta Platforms Inc Board of Directors (BOD) That big tech company as the public one has a large number of board members at around 23-24 people, the size would be periodically reviewed to increase or decrease and fixed by the board's resolution (Meta 2020, Crunchbase n.d.) Particularly, that board is constituted by the majority of the independent non-executive directors who are the group of experts in various fields, neither run the business nor have any connections to the firm’s performance and the minority of executive directors (Ethics & Board 2021) The model demonstrating the relationships between key players of CG is presented below Figure 2: Corporate Governance Model While the circle represents the board as its members are in the same level and have the equal rights to vote, the Management team is defined by the triangle as implying the hierarchy structure or levels of managers From the model, the small intersection part is a place for the minority of executive directors being both members of the board and the top managers running the business Also, the largest part of the circle represents non-executive directors, specifically the independent ones in the Meta's case with the annually appointed Lead Independent Director Different levels of managers not sitting in the board are in the rest of the triangle With the outsider-dominated board, that structure plays a key role in the oversight of the management team, making and reviewing the important decisions, helping the firm balance free speech As its members are specialists from various cultures, professional backgrounds, which would bring out different ideologies, perspectives and have a holistic view that significantly reflects the diverse group of people (Meta n.d.) Also, it would make independent judgement and recommendations in specific areas in the way of fairness Overall, designing the board in the way that maximizes outsiders reflects the modern corporation, which helps eliminate the issues that always arise between people inside However, the negative relationship between board independence and firm performance is the limitation of that board type, which is reported to happen in Australia (Grace et al 1995), America (Baysinger & Butler 1985, Bhagat & Black 2002), and in the emerging market like Bangladesh (Afzalur 2018) Furthermore, Meta is identified to have the Unitary or one-tier board structure as only having a traditional board that comprise executive and independent non-executive directors rather than stakeholders The Unitary board allows to fasten the decision-making process, as exchanging, discussing information would be much easier, flexible and directly The efficient information flow enables monitoring and counseling, decisions would be made together when both types of directors sit in the same table rather than the long decision-making process of separated boards in the dual structure that could lose several opportunities in the market Moreover, when the nonexecutive directors sit together with the Management team, they would understand deeply about the current business situations, and that type also requires less administrative burden and could save that cost On the other hand, the top manager or CEO holding the chairman position could mix the role of monitoring and running the business The ineffective control CEO causes a common issue in the U.S that the CEO abuses the power and obscures unethical behaviors of the management team Also there could be a potential risk of forming a coalition between CEO and outside directors that resist takeovers (David & Guler 2010) As BOD is the mechanism of CG helping shareholders control directors and managers, facilitate their interests However, with the Unitary type of board, the issue of abusing the power and producing unethical misconducts caused by top managers happens more frequently compared to the Dual structure Thus the solution of designing the committees inside the board is mainly driven by that model which could facilitate the role of non-executives directors who find struggle as not running the business to easily monitor the management team This solution from many scholars and practices were later regulated by the government due to its effectiveness; therefore, several committees including Audit, Remuneration, and Nomination are requirements for the public company’s board to effectively control the management team Board Committees In the case of Meta, the board currently has standing committees namely Audit & Risk Oversight Committee (A&ROC); Compensation, Nominating & Governance Committee (CN&GC); Privacy Committee (Meta 2020) All these committees are composed of only independent non-executive director type to comply with the applicable legal, regulatory and requirements of stock exchange From the committees’ members, the role of independent nonexecutive directors is implied to be extremely significant in the CG model of the modern corporation; as not having any connections with the firm, allocating them in almost all committees could assist the board to perform the responsibilities of oversight and controlling the managers in different functions with transparency Specifically, A&ROC plays a key role in monitoring the auditors who provide the financial statement to the investors, the process of audit and financial reporting, the internal and external audit functions, the firm's internal control and risk management systems, and compliance with laws and regulations (Meta 2021) That required committee would avoid the abuse of the executive directors, ensure that auditor and top managers would not have any under table deal, recommend and make independent judgements in the particular field, and help the non-executive directors understand the company’s present status Besides, CN&GC is responsible for compensation, nominating, and CG matters Regarding the first issue, this committee’s duty is reviewing the overall strategy of compensation or remuneration related to base salary, incentive compensation, rewards, reviewing and controlling the salary, policy and compensation factors for top managers, evaluating their performance, assessing all forms of compensation including cash and equity-based, monitoring the compliance with regulatory requirement for compensation of employees and directors (Meta 2020) In terms of nominating and governance issues, the committee's role is to identify potential candidates for senior managers of the company, provide the criteria, evaluate the performance of board’s members, control the selection process including the appointment, election, recruiting, prevent the abuse of top managers, also develop a code of conduct, ensure that the firm would run in the way that comply with the CG codes and the company law of government (Meta 2020) Apart from that, the Privacy Committee assists the board with privacy and data usage issues including periodical policy assessment related to risk management and the privacy program, overseeing the compliance with the privacy program, reviewing the privacy practice, etc Remuneration Overall, the company has focused much on the Agency theory when designing the remuneration policy that has a strong connection with the firm's performance rather than taking care of them by giving pensions and other benefits like health insurance According to that theory, the remuneration policy must be developed in a way that ensures the agents work and serve for the best interest of the shareholders or the firm's profit meaning contribute to the good performance of the business Meta has mainly used remuneration measures linking to the contribution of the company's performance for the top managers including base salary, bonus, non-equity incentive, stock award value, option award value, long term incentives (ExecPay n.d.) Particularly, these remuneration packages would be analyzed with pros and cons Firstly, only the base salary is not related to the company's performance; however, this type is as the basic right of employees and is binded by law, thus many companies try to minimize that type to avoid the issue of receiving high payment even when the business goes down, which happened in 2008 in the US However, the company should give the appropriate amount of base salary matching with different positions rather than offering too low amount, as it would help guarantee and support the directors and employees' lives Also, that type is the first criterion that candidates are looking at, thus a good base salary would attract more potential employees to the company's positions Secondly, applying the bonus would effectively improve the company’s short-term performance This package is a great encouragement that motivates employees to work harder and more effectively, which would help firms increase their profitability However, offering bonuses with high targets would make them feel stressed, and they would seek out the cheating way, produce unethical behaviors harming the corporate as reported in the Enron’s scandal Bonus is not an useful measure for contributing to the long-term performance, the sustainable development of the firm and could result in many problems for the company if they mostly base on the bonus to design the policy Also, fierce competition among the company’s employees is another impact of that type, which generally helps increase the firm’s profits while could be problematic sometimes such as damaging the relationships among employees, etc Thirdly, giving the stock option or offering the shares for employees to buy when they contribute to the good performance of the company would help improve significantly the long-term performance When they become the shareholders holding the shares of the company, they would work harder to boost the performance and build the good image of the firm, and have high-level of loyalty, they tend not to have any unethical behaviors as they could gain benefits from higher share price if the performance goes up Thus, this type of remuneration package would enhance the sustainable development of the company, its image, and reputation in the long term However, offering stock options when the business are small-sized and does not have high performance or have difficulties, that type is not attractive for the employees and they would prefer other types As a small number of shares would not motivate them to contribute to the long-term performance, they would rather transfer the share to someone in the stock market, the issue of free rider could arise On the other hand, when giving them a big proportion of share, they would become big shareholders having too much power and also try to be the senior managers running the business by themselves Then it could lead to the conflict of interest between big and small shareholders or principal-principal issue, the decisions of big shareholders which aim to maximize their interest could be harmful for the benefits of small shareholders Lastly, even though offering the stock or stock grants is different with stock options in term of form of remuneration policy, both of them help enhance the long-term performance of the firm and share similar benefits as well as limitations with each other Thus, the company should be careful when putting those types in the policy as offering employees too much or too little shares could be problematic Other types including non-equity and long-term incentives would help the business buy their loyalty, make them feel the sense of caring, and motivate them to work harder, long-term engage with the company CN&GC would be incharge of designing the remuneration policy and taking into account main issues including legal, ethical, regulatory and competitive issue for designing As mentioned above, the majority of independent directors dominate that committee and are only given the type of non-performance related including base salary and other benefits Innovation and sustainability perspective In the technology-driven economy, a large number of today's successful businesses operate as platforms which are characterized by the features of transaction facilitator and organizing for innovation Particularly, the platforms play a role as intermediaries promoting economic transaction, information transformation, social connection through the utilization of networked technologies Platform companies generate profit by facilitating interactions between value providers and extractors More importantly, the model incorporates stakeholder’s feedback and input to enhance user engagement and experience with platforms Thus, the internal operations of sustainable platform companies are arranged in an open, flat and inclusive manner to facilitate cooperation among various stakeholders, as such, continuous innovations are delivered in platform’s capabilities as well as its goods and services Almost all successful platforms disrupt and decentralize their model, and enable direct peer-to-peer transactions between users and service providers Smart platforms, as a result, break from the typical closed, hierarchical, and centralized corporate structure The bureaucratized corporate culture caused by the hierarchical structure renders established firms unable to respond rapidly and effectively to the challenges of rapid changes in technology, consumer demand and market, thus struggling to survive in a dynamic business environment Implications of CG model Being the adaptation of the traditional corporate structure, CG emphasizing on primacy of shareholders makes less sense in an economy driven by innovation As the platforms are organized in the way of facilitating constant innovation, thus its governance focuses on building a flat, open and inclusive corporate environment exploiting talents of all stakeholders from that network (Fenwick et al 2019) However, regulatory pressures from the traditional CG are about maintaining hierarchy, centralized authority, control and monitoring for the purpose of maximizing the shareholder values and protecting their interest, which disconnect with the needs for a successful platform Moreover, from the perspective of innovation and sustainability, the existing regulatory framework which promotes a negative corporate attitude failing the platform as explained below must be replaced by the platform governance Firstly, the primary goal of maximizing shareholder values builds the corporate environment prioritizing short-term profit and formalistic compliance, which obscures the innovation matter and has detrimental impact on the corporation's long-term prospects of remaining relevant, the firm's sustainability (Fenwick et al 2019) A large number of listed companies which focus strictly on financial metrics are easily distracted from the vital task of finding strategies for remaining relevant in the long term Furthermore, the significance of generating profits for shareholders as highlighted by the traditional governance drive executives to seek quick and easy payoffs in the short-term, and the managers focusing on customer experience and innovation are frequently excluded from the decision-making processes (Fenwick et al 2019) Such attitudes nothing for the long-term prospect of the company Also, following that shareholder primacy view could render company's practice being detrimental to the employees' interest Particularly, mass layoff was implemented by the companies to achieve great quarterly performance, maintain the stock price level, which would generate the negative corporate culture (Fenwick et al 2019) The culture of distrust between managers and employees contributes to job dissatisfaction, failure of encouraging employees, employees unhappiness which play a key role in customer satisfaction, commercial success in the long-term and innovation The urgent requirement for changing traditional CG from the perspective of sustainability is supported by the knowledge of CSR Firstly, the shareholder primacy view shares some similarities with the Agency theory As the theory of Milton has emphasized the primary goal of business as generating profit, put the shareholders in the core value, the interest of shareholders as the company’s owner must be protected, respected, and served by the servants who work in the business Focusing on generating profit only encourages managers and employees to produce unethical behavior or cheating the system for fast payoffs Therefore, according to the stakeholder theory, rather than only bringing benefits to a very narrow group of stakeholders as finances and stakeholders, the company’s goal must focus on maximizing benefits for the stakeholders at large for achieving sustainable development From that view, the shareholders are not the owner of the company as there is only the contractual liability between the shareholders and the corporate under the law; instead, the stakeholders as the group of individuals who can affect and are affected by the achievement of the organisation's purpose are the genuine owner of the corporate However, caring for and facilitating the interest of too large group of stakeholders with the limited company’s resources is not realistic, which is a problem of stakeholder theory As a solution for this problem, based on the research of Michel, not only shareholders but also employees, customers are dominant stakeholders that the company need to take care and facilitate their interest, as all of them have power to influence the company, legitimacy as they need to take care for product safety, salary, labour standards, need to bring the benefits for them V Recommendation Meta’s CG model which focuses on controlling, monitoring processes toward the Management team and maintaining hierarchy structure is unlikely to facilitate sustainability and innovation As clarified above, due to the tension of the regulatory pressure of the existing regulatory framework of Meta and the needs for a sustainable platform, the firm would struggle to respond to rapid change of technology and the fast-moving consumer demand Thus, it raises the demand for changing CG that should be well-suited in the world of platforms Firstly, the strategies crucial for establishing a successful platform must be considered, then aligning the business needs of platforms for identifying a more effective and sustainable CG model In other words, CG model should be built on the idea of incentivizing companies to embrace these strategies that help maximize the opportunities for innovation and achieve sustainability Firstly, the company should utilize new technologies for building communitydriven organizations Digital technology has played a key role as the foundation and infrastructure for building capacity for innovation, reinventing sustainable platforms and globally expanding its model, also it provides peer-to-peer solutions Secondly, the platforms must establish an open and accessible corporate culture The proper communication is a key for the open platform culture Thirdly, the platforms must deliver meaningful platform content to users To pursue those strategies, Meta should appoint a variety of technological experts who have digital experience to BOD Those experts could be in different functions and types of digital technologies such as hardware, communication networks, algorithms, cloud-based storage, etc The engagement of different expertise and mindset for innovation is crucial for the objectives of technology utilization and enhances the strong relationship between platforms and users Also, the perspective of innovation and sustainability should be emphasized and put in central in the decision-making process Moreover, the executives in the board who are best placed for delivering innovation must be highly aware of, constantly anticipate, and plan for integrating the future technologies to ensure remaining relevant in the future The case study of The Walt Disney Company is an example of the application of that recommendation BOD of that company has included experts from other social platforms such as Seryl Sandberg from Facebook and Jack Dorsey from Twitter and Square to bring their digital experience to the company’s decision with the aim of leveraging the latest technologies, advancing and scaling up the platform, improving their customer relationships (Fenwick et al 2019 Moreover, the board members should be treated as feedback providers rather than the supervisors who monitor and control the senior managers As in the existing framework, their responsibilities as oversight toward the management team could lead to the strict concentration of formalistic compliance, monitoring managerial misconducts, which distract from designing the initiatives for contributing performance in the future Thus, their role is no longer appropriate in facilitating innovation, instead, the company should treat them in a way that works in collaboration and cooperation with the managers and CEO of the company Also, the remuneration committee inside the board should reconsider the remuneration policy, particularly, they should focus on the packages that are helpful for the long-term performance of the business such as the stock-options and stock grants They should not rely too much and set the appropriate (not too high or too low) payment for the packages that are not related to the performance such as base salary and just affect short-term performance like bonuses, which could prevent focusing too much on making profits in short-term and avoid unethical behaviors while still attract the high calibre executives and employees Also, some benefits such as health insurance, etc should be added to create the corporate culture that motivates employees and achieve employees job satisfaction, their long-term engagement 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