Great swings in the ‘information asymmetry’, and Facebook
Last week, I spoke about the effects of “information asymmetry” where a potential purchaser of services and goods, or indeed, stocks, has less information than the seller. I argued that this “information asymmetry” allows for a sub-genre of consultants and analysts to make a living by trying to level the “information” playing field. They analyse the seller’s value proposition and provide information to the buying party in a structured and cogent manner in exchange for a fee.
In finance, the assumption is always that the management of a company knows more about its internal workings and future prospects than potential buyers of stock or other financial instruments issued by the company. As a result, many laws have been passed the world over in order to keep corporate management honest, and full disclosures of a bunch of financial information are required from company management. It is now the norm rather than the exception for managements to exercise full disclosure of all information to the investing public.
The field of information technology (IT) is different from finance. Recent advances in IT mean that it morphs so fast that information available today may be completely out of date tomorrow. Great swings in “information asymmetry” can occur in a short span of time. This does not narrow itself to buyers of IT or investors in IT companies, it also extends itself to sellers of the actual IT, as events at the once unstoppable Facebook have shown during this past week.
First, here is an unkind presentation of a series of purely financial events which could lead one to believe that Facebook management probably knew the boom was being lowered:
Mark Zuckerberg and his wife started a charity after the birth of their child in 2015. Their charity is called the Chan Zuckerberg Initiative (CZI) and its first declared aim was to devote its funding to research that could eradicate all diseases. Zuckerberg started to sell his shares, in a fully disclosed fashion, to support this initiative. After CZI launched, Zuckerberg had said that in order to support the initiative, he planned to “sell or gift no more than $1 billion of Facebook stock each year for the next three years”.
Facebook’s election-related problems started in 2016. In September 2017, Zuckerberg announced that he would accelerate his plan to fund CZI and sell up to $12.8 billion of Facebook stock (at September 2017 valuations) over 18 months. He started to implement this plan just last month, when filings made in February confirmed that the first sales had begun.
Now, a kinder, and possibly more accurate analysis, once the warp speed of IT change is accounted for:
I truly believe that neither Zuckerberg nor any of his management team had a real appreciation that some of the users of its data could—and would—hold on to private data from Facebook’s users, even after being asked to purge it. It is my contention that there is no way that Facebook’s management could have known what resided on every remote server at every single user of its data, let alone be able to police it through audits in the absence of laws supporting such action.
Also, Zuckerberg has evidently pledged to eventually sell or gift up to 99% of his ownership in Facebook to fund philanthropic initiatives, so casting “inside information” aspersions on his selling shares to support this pledge is unfair.
We need regulators to step in to decide who gets to use private data and who doesn’t. Europe has already shown us the way with the General Data Protection Regulation (GDPR) restrictions around the private use of data. These rules will come into effect in May 2018. The US, India and other countries should follow suit by implementing GDPR-based restrictions without laying blame on company management.
Arguing that what suits Europe doesn’t suit the rest of the world is disingenuous. After all, in the financial realm, the rest of the world used to have much more lax insider information laws than the US, but these have now been tightened up to US standards everywhere.
If the US led with insider information laws, let Europe lead with private information laws.
Siddharth Pai has led over $20 billion in technology outsourcing transactions. He is now founder of Siana Capital, a venture fund focused on deep science and tech in India.
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