By Joel Peterson
April 27, 2018

Facebook (FB) investors and staff probably let out a collective sigh of relief on Thursday, after the social media giant reported stronger-than-expected earnings that sent shares rebounding back to near-record highs. But strong financial performance doesn’t mean that all is well for the social media giant.

In fact, Facebook has a larger long-term problem with user trust that isn’t showing up in its financials yet, and may well be expensive to fix.

Facebook was founded 14 years ago. It went public six years ago at a valuation of over $100 billion. Today, its market cap is almost $500 billion, apparently earning the “trust” of 2 billion people who use it every day in what has become a virtual utility in the fast-paced lives of its users.

So far, it has defied what Warren Buffett said about reputation building: “It takes 20 years to build a reputation and five minutes to ruin it.” The first quarter results show that Facebook has not lost trust with a bang. But, unless it completes the process of dealing with betrayal, it may find it leaking slowly away, like a tire losing air.

Sheryl Sandberg acknowledged on the conference call they did lose a handful of advertisers as the privacy concerns were raised, related to the unauthorized use of Facebook user data in the 2016 presidential campaign.

Costly, but necessary changes ahead

To stop the leak of trust, it’s going to require some expensive—and mandatory—work in the form of better security and privacy controls. Already, the social media giant has disclosed some of the higher costs associated with this effort, reporting in its latest 10-Q filing that it plans to increase operating expenses by 50% to 60% through the remainder of the year, driven largely by new investments in safety and security. On a conference call with analysts following the earnings release, executives admitted that this spending is being accelerated, tightening the company’s margins for the year.

And this comes alongside larger changes in Facebook’s business model, in which Mark Zuckerberg says he is steering the business away from optimizing to “time spent” by users and toward a new focus on connections over consumption.

While this is positioned as a counter to mental health concerns perennially raised about social media use, it also muddies the picture of whether Facebook is losing some of its edge with users. It’s not clear if, in fact, user engagement is falling off, because Facebook declined to provide those numbers.

I will say this: Zuckerberg and his team have honed their crisis-management skills well. In front of Congress earlier this month, he took responsibility, asked for forgiveness, and claimed that Facebook will do a better job of self-regulating, pledging to make clearer terms of service and opt-in/opt-out agreements.

Still, something doesn’t sound quite right in his mea culpas.

Perhaps it’s simply inauthenticity born of Zuckerberg’s brainy, robotic delivery. Maybe it’s the prior deceptive activity at the company, which resulted in a 2011 consent decree. Maybe it’s the modern era’s slick crisis-management platitudes from corporate and political advisors.

But, possibly, he’s merely solving for what I’d classify as pseudo-trust—a fake or superficial trust.

“Fake trust” at the heart of Facebook

There are three forms of trust.

Reciprocal trust is found in families, friendships, teams, and business partnerships with the same values and goals, mutually reliant on each other for success. Representative trust, on the other hand, is an uneven exchange that produces the results that allow society to function—such as between professionals and clients or employers and employees. But pseudo-trust is purely transactional, short term, and superficial—reliable only so far as interests are coincident. You may have felt a sense of pseudo-trust with politicians seeking your vote or salesmen promising results.

Facebook’s trust structure is codified in a user agreement that nobody reads, jeopardizing Facebook’s future as trust is violated. It has no chance of becoming reciprocal. And under the current system, little chance of being representative. In a word, users feel, well, used.

How can the company accomplish this change, especially with its billions of customers around the world?

If Mark Zuckerberg were to ask me what to do, I’d say there’s a final step to overcoming betrayal that goes beyond acknowledgement and apology. And that is fixing the problem.

Facebook can fix this

I recall a decade ago when an ice storm on the East Coast caused massive flight delays and cancellations. JetBlue (JBLU) was swamped with complaints about its communications and reservations technology that left passengers stranded in the terminal and on runways for hours. Our founder and CEO David Neeleman owned up publicly, taking responsibility and apologizing. In a cracking voice, he said was “humiliated and mortified.” Then, he produced a customer “Bill of Rights” that has since been copied by competitors.

In the Facebook case—with all due respect for having taken the first two vital steps to repair a betrayal—no one knows what action will be taken.

I would advise the gifted young founder to consider creating far more consumer-friendly terms of service agreements and ways to opt-in or out of various services. Make them shining examples for all other online services to follow. Set the standard.

 

Want to keep Washington at bay? Include warnings, not unlike those on drugs or cigarettes, about the dangers of using Facebook and social media so that users fully understand what they are getting into when they use the service.

Extreme? Yes. But if Facebook doesn’t come up with a plan for real change, the hissing that accompanies a leaking of trust may well continue. Eventually the company, like a flat tire, will no longer be able to realize the speed for which it was designed.

Joel Peterson is on the faculty at the Graduate School of Business at Stanford University and is the chairman of the Board of Overseers at the Hoover Institution at Stanford, as well as the chairman of the Board at JetBlue Airways. Peterson is also the Founding Partner and chairman of Peterson Partners.

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