How Companies Blow It: Whistleblowing, Facebook and the Double Problem

Facebook’s whistleblower, Frances Haugen, has made international headlines with her claims about the inner workings against the tech giant. As more details continue to surface about the data and inner workings of Facebook, we sat down to discuss business ethics in the era of big tech with governance expert, ethicist and Professor Jared Harris. 

Q: Frances Haugen, the former Facebook product manager turned whistleblower, shared deep insights of the inner workings at Facebook, and some of what we saw in her testimony before Congress was shocking enough that Congress may act to design regulation for social media platforms. But is whistleblowing really the best way to get to needed reforms? 

A: Well, at some level whistleblowing is good — we now know from the whistleblower more about how decisions were being made at Facebook; we know about the results of their internal studies on the well-being of teenaged girls who use some of Facebook’s products; we know there has been a shocking breach of trust between Facebook and its users and Facebook and some of its employees. In some sense, whistleblowing exists because it works — it brings things to light that otherwise would have remained in the shadows. It is a safety valve. 

But it’s always second best. From an organizational perspective, whistleblowing is always a bad sign. If you are an organizational leader, the existence of a whistleblower suggests a sort of double problem: There’s the problem the whistleblower is revealing, of course, but when a whistleblower emerges it also suggests a larger problem involving how difficulties are being silenced or ignored within the company. In other words, someone blowing the whistle indicates a governance failure; it means you are failing to do all these things your stakeholders expect of you. It means you likely haven’t built an effective process for dealing with tough questions, conflict and controversy, and that you have not built effective processes for stakeholders to ask questions or communicate bad news to managers. You obviously haven’t made the right investments in mechanisms for feedback. It likely means you haven’t been transparent enough. It means you have so dramatically eroded trust within your team that someone has had to publicly air your failures in order to force course corrections. Your business would be way better off if a whistleblower wasn’t the mechanism for organizational self-examination and change. 

Work on whistleblowing suggests something consistent with what I found in my interactions with real-life whistleblower Tyler Shultz on a recent case about the fall of Theranos: Whistleblowers certainly are motivated to do something good — right the ship, make the company better. And sometimes in poorly governed organizations, that’s necessary. But there are real costs to being a whistleblower. Many of them report that they were totally unprepared for the ways that being a whistleblower damages their careers, their relationships, their mental health. It isn’t a good thing that our society has come to rely on whistleblowers instead of on better governance.  

Q: Why is that? Where do companies like Facebook go wrong?  

A: Sometimes there are bad actors in leadership positions who orchestrate and perpetuate fraud or misconduct and then cover it up. That happens. But other times, whistleblowing happens at companies where there has been a complex confluence of fairly benign things that collectively caused people to lose focus on the organization’s purpose and on their values. They may have had high turnover, for instance, so people aren’t as connected to the values of the company. They may be in a highly competitive industry, which often motivates them to take excessive risks. Sometimes internal incentives contribute to driving bad behavior. Unethical strategies and practices can be deliberate and orchestrated, certainly, but they also sometimes emerge from a larger set of complicated issues. In either case, there’s a failure of stopping to ask what values are at stake in a certain set of decisions. Even if there’s no criminal mastermind to pin the scandal on, organizations can lose their ability to visualize something important. So sometimes a whistleblower steps up to shine a light on it.  

Q: If we chronically rely on whistleblowers to be the conscience of our economy, does this say something is fundamentally wrong with capitalism? Facebook’s profit was up to $11.2 billion in 2020. Markets are rewarding their ability to keep users on their platform viewing advertising, even if it makes users feel suicidal or depressed. The moral genius of capitalism — Professor Pat Werhane talked about this — is that firms are required to imagine the problems of their customers and find ways to make their lives better. If we have lost the ability to visualize the needs of our customers, is capitalism in trouble? 

A: In my view, this old argument about focus on shareholders versus doing the right thing is kind of irrelevant now. Facebook’s problems have now escalated in a way that’s unlikely to resolve painlessly. I suspect Facebook’s investors would really, really rather it not be this way. Investors are increasingly smart, as a group. They have figured out that firms’ environmental and social impact, and their ethical behavior, are indicators of how those firms are governed, and therefore of their long-term viability. It is a caricature of investors that they are all narrowly-focused day traders seeking only short term gains. Investors want companies to succeed. They want companies to produce value, not poison their kids or make them feel depressed. When you hear major asset managers saying corporate climate change strategies are an indicator of how seriously a firm is going to compete in the future, you realize that shareholders, like other stakeholders, want companies to stick around. A snarky headline might be “Investors punish Facebook for making them money.” And that’s exactly right — investors actually will punish Facebook if they neglect other important responsibilities. But a whistleblower complaint and an ensuing scandal and a valuation drop and a raft of negative headlines are all less desirable than if the company had been better governed internally — and not lost sight of the importance of considering a range of stakeholder interests consistent with a set of guiding values. 

Part of the problem may be the prioritization of some stakeholder needs over others, with the short-term appeal of doing so inordinately occupying leaders’ attention. In the old economy, the end user was always the customer. In online businesses and social media, the paying customers are actually the advertisers and the firms that use consumer data. So while it appears from the whistleblower’s testimony that Facebook has exhausted themselves trying to solve that problem — how to get more eyes on ads, more clicks on ads — there was a drifting away from the importance of asking a different kind of purpose-driven question: How much time would be healthy for 11-year-old preteens to spend on the app? One of the challenges in the new economy, I think, is that not all parties have a compelling enough voice in the boardrooms of these companies. Who speaks up for the preteen users? Well, nobody, apparently, since they aren’t paying customers. But it’s worth remembering that Facebook was originally designed and founded from an end-user perspective. What happened to that focus?  

So capitalism isn’t the problem, really. The problem is this failure to execute on the promise of capitalism. Where do we fall short? What’s being ignored? Some firms become “cafeteria capitalists” — they love it when the system puts them up $11 billion but are less eager to pay the “full costs” required for long-run viability. Well-governed firms, on the other hand, are full participants in capitalism — which means they think about both temporality and externalities. “In the end, markets clear” isn’t good enough for them, because their stakeholders are living in the world right now. Their decisions today affect stakeholders today. Well-governed firms don’t just wait on the system to make their decisions for them. And well-governed firms don’t move the real costs of their businesses off their books, onto society, onto communities or onto employees. They figure out how to confront and internalize those costs so that they can continue to keep faith with their full range of stakeholders — and this allows them to continue to operate their business over the long run. If you are in a business that relies on its ability to push unreasonable or unethical costs onto certain stakeholders in order to deliver value for other stakeholders, it won’t last. If you are in a firm that is reaping the benefits of imperfect competition, look out — your stakeholders will punish you, and innovators will come for you.  

Q: So how should companies prioritize ethical behavior — how do they avoid losing their ability to imagine their customers’ needs or their employees’ needs? 

A: Companies need purpose at their center. Good corporate governance is not that complicated, really: Governance is simply about the way in which an organization organizes around, and executes on, its purpose. If its purpose is to make shoes, great! They should align all their practices around how to responsibly produce the best, most competitive shoes on the market. Whatever business a firm is in, they need to make sure their stakeholders’ values and needs are part of their business model and fully accounted for and engaged with. Facebook needs to recapture its soul and its heart — no shareholder, no employee, no supplier or advertiser gets up in the morning inspired by another short-term arbitrage opportunity. They get excited about creating a lasting business, about making cool stuff, about inventing something that didn’t exist, about solving people’s problems. And they know that if they do that, they can make good money.  

It’s critical that companies have to have processes in place that enable — perhaps require — their managers and teams to ask themselves important, tough questions. This reminds me of an exercise from strategy known as “kill your company.” This requires executives to shift from thinking about what’s going well at their organizations to instead think like a competitor and identify what the weak points are, which tends to be quite revealing. Similarly, firms should be persistently asking themselves tough questions about whether current strategic choices are consistent with the soul and purpose and values of the firm. What are we missing? How could this escalate into something we might regret? How could I defend this action against critics? What’s good about this? What would I want our company to do here if I were the critic? What is it we’re not willing to do, based on our values? Questions like this, involving the organization’s purpose, can give oxygen to a conversation about how those values are being enacted or ignored — and may prevent the need for a whistleblower to raise an alarm elsewhere instead.

Professor Harris recently joined Professors Mary Margaret Frank and Ed Freeman as the newest faculty director of the Institute for Business in Society, at which Joseph Burton is executive director.