Peter Thiel, co-founder of PayPal Inc., speaks in San Francisco.
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Facebook has business relationships with Gawker and other media outlets upset by Thiel's actions.

By Eleanor Bloxham
May 31, 2016

By now, the Facebook board should have asked PayPal co-founder Peter Thiel to resign from the social media giant’s board.

Thiel has been feeling some heat amid revelations that he secretly funded lawsuits against media outlet Gawker. (Some recent coverage on that from Fortune is here and here.)

But when Thiel decided to fund the lawsuits, as morally challenged as many believe those actions to be, he had a duty to inform Facebook’s board that he had a conflict and would need to step down.

That’s because Gawker is a Facebook customer and supplier — and as it turns out, a vocal brand ambassador for the social media company as well. In a January Business Insider interview, Gawker CEO Nick Denton announced that “Gawker Media is going ‘all in’ on Facebook Instant Articles…adding that he was in fact ‘totally into Facebook from the very get go.’” The Business Insider article explained how Facebook gains revenues and data intelligence from these arrangements with publishers. Ironically, the same article also noted that Gawker had recently sold a stake in its business “to be put toward its ongoing lawsuit with wrestler Hulk Hogan.” That lawsuit, among others Thiel has funded, have threatened Gawker’s business. In addition to the contract Facebook and Gawker signed related to Instant Articles, a Gawker source says the media outlet also has a contractual relationship with Facebook related to Facebook Live. In that relationship, Facebook pays Gawker.

 

 

Thiel has said that he considers the lawsuits he funded against Gawker to be an act of philanthropy. But any board member engaging in activities, including charitable efforts, that conflicts with the company’s business needs to exit.

So, did Thiel inform Facebook’s board that he was secretly funding lawsuits against one of the social media firm’s clients and suppliers? Or did the board find out from a Facebook newsfeed? Peter Thiel and Facebook did not respond to requests seeking comment.

Then again, Facebook may not care very much about corporate governance. After all, it has one controlling shareholder in Mark Zuckerberg. It has granted fewer voting rights to one class of shares and plans to issue a new class of shares that have no voting power. (A shareholder suit has been filed related to the new class.) It has directors with past relationships, like those between Thiel and Marc Andreessen (PayPal). And the disclosures of directors’ backgrounds on its website are grossly out of date. (Just one example: Marc Andreessen left the eBay board in 2014.)

But when board members agree to serve on a corporate board, they are supposed to act as fiduciaries, putting the company first. That includes not engaging in activities that could harm the company’s business.

Facebook’s board needs to wake up. Mark Zuckerberg lost a shareholder suit last fall because of a failure to be transparent over board directors’ pay. And the board’s nominating and governance committee needs to discipline directors who are not upfront about their activities.

Since Facebook shareholders have no recourse through their voting power, perhaps a deep-pocketed shareholder will fund lawsuits against Thiel or the board to address how the company’s directors behave. No matter the outcome, this saga has generated a negative impression not only of a man who has engaged in highly questionable charitable pursuits but also a board that would tolerate this kind of disloyalty.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.

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