Big corporate scandals rarely come out of the blue. Which is why those of us who've been following the reporting on the role of Cambridge Analytica and Facebook in the EU referendum and US election aren't in the slightest bit surprised by the crisis that is currently engulfing the social media giant. DSC_0039.JPG

We're now familiar with the plot. In early 2014, 270,000 people took an online personality test which appears to have led to the information of 50 million of their Facebook friends being passed to the villains featured in Channel 4's secret film about Cambridge Analytica. Cambridge Analytica is a particularly nasty company whose raison d'etre for the past 20 years or so has been to ferment coups and manipulate government elections.

In Act Two of this drama, we discovered that Facebook first learnt of these breaches over two years ago (following dogged reporting by Carole Cadwalladr for the Guardian). And it failed to alert its users that data had been used by third parties for commercial purposes, and took only limited steps to recover the data in question.

The plot thickened in Act Three with the appearance of a whistleblower called Sandy Parakilas who claimed that hundreds of millions more people were likely to have had their information harvested by outside companies, and that when he was working for the company, Facebook barely had any systems for monitoring how such information was used. Parakilas told the Guardian that he warned senior executives at Facebook that its lax approach to data protection risked a major breach.

Roll forward to Act Four, when last weekend the Guardian revealed the harvesting of personal data from 50 million users - and its use by Cambridge Analytica to manipulate voters in the 2016 US election. By Monday, Facebook shares had slid by 6.77%, knocking $36 billion off the company's valuation as investors worried about the consequences of these revelations. #DeleteFacebook became the top trending hashtag on Twitter, followed closely by #WheresZuck in reference to the CEO's silence. US senator Ron Whyden sent Zuckerberg a detailed list of questions related to the breach, with a demand for answers by 13 April. Senators Amy Klobuchar and John Kennedy called for hearings with the CEOs of Facebook, Twitter and Google. And here in the UK, Damian Collins MP, chair of the digital, culture, media and sport select committee called for Zuckerberg to appear in person.

This Is Where We Pick Up The Story

In the corporate world, as indeed in all business, reputation is everything. According to an article in the Harvard Business Review, 70 to 80% of all value on the stock market derives from "hard to access intangible assets such as brand equity, capital, and goodwill." This means that top-flight companies can:

  • Hire and retain the very best people;
  • Charge more for their products;
  • Achieve better profit margins;
  • Benefit from higher share ratings;

So creating a virtuous cycle.

Paradoxically, companies with poor reputations:

  • Have trouble hiring and keeping people;
  • Get treated with suspicion by government and regulators;
  • Are shunned by their customers and investors.

In Facebook, we're witnessing what it's like to lose a corporate reputation - a key component of its value on the stock market. And ironically concerns about reputation are rippling through Facebook's own network as users debate whether to #DeleteFacebook.

Losing your reputation is one of the biggest risks many companies face. Which is why it pays to create and review a risk management plan. And why, for example, companies in the insurance world have created policies to protect their clients from reputational disasters.

When faced with a crisis that is so damaging to your reputation, as Facebook is, the first important public action should be an immediate, whole-hearted apology, expressing regret, acknowledging full responsibility and making an offer of reparation that goes beyond mere words.

The Problems For Facebook

The problem for Facebook is it was warned multiple times that its approach to data protection risked a major breach, and so far has appeared to do very little. In fact, I'd go so far as to say that every time bad news has broken, Facebook's executives have downplayed its significance. Senior executives have appeared to dodge Congress and the House of Common's select committee while Zuckerberg was happy to don an uncharacteristic suit and tie to meet with Russian Prime Minister Dmitry Medvedev.

The bottom line is it took Zuckerberg five days to break his silence on a scandal that has enveloped his company all week, and inflicted considerable reputational damage already. While so far Sheryl Sandberg, Facebook's chief operating officer, has merely Zuckerberg's post and added her own comment: "We know that this was a major violation of people's trust and I deeply regret that we didn't do enough to deal with it."

While a step in the right direction, yesterday's eventual apology, in my experience as a former CEO, fell well short of what was required to restore trust and confidence, and to stem the tide of reputational damage. There are times when it's advisable to keep quiet to avoid misstatements, but this was definitely not one of them. The future of Facebook - and Zuckerberg himself - depends on how he responds to this major leadership challenge. Leadership requires not just visibility, but also authentic action, neither of which have been evident thus far.

Facebook Is Facing An Existential Test. Will It Rise To The Challenge?

I'll be discussing this, and other business related questions arising from this scandal on "Saturday Musings," live on Facebook on Saturday, 24th March at 10.00am. I hope you'll be able to join me.

Meanwhile, you might enjoy this further reading:

Question: What are your thoughts on the Facebook scandal? Have you considered deleting your account? I love reading your feedback so please do take a moment to share in the comments box below.


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Photo source: Andrew Feinberg.