Note: Facebook changed its corporate name to Meta on Oct. 28, 2021, after this video was filmed.
KEVIN: Joining me today is Brian Christiansen, who has a lot of roles here at Sands Capital. Among them is the head of stewardship for the firm. There’s an interesting issue that’s been in the headlines a lot lately that I think our listeners and viewers would be interested in hearing your take on from a stewardship perspective, and that’s thinking about how we evaluate companies that, on one hand, might be very good investments and have bright futures ahead of them, but also may not be the savoriest of actors out there. You know, the debate might still be ongoing, but there’s potential that they could be doing some sort of harm to society.
And, of course, I’m talking now specifically about Facebook, but I think your perspective on that applies more generally to how we think about investments in the context of your stewardship role. So maybe give us some high-level thoughts on that.
BRIAN: So Kevin, I think it’s important when assessing a company’s sustainability, both their vulnerability and their opportunity, and how you “stack rank” one company versus another. We really try to take a lens of three major questions and ask that of every single business that we own.
And the first major question is “Is this a company in the first place that provides a net positive benefit to society?”
In other words, if this company never existed would society be better off, or would they be worse off? So that’s the first question. The second one is “As a company scales, does the use of products and services create negative externalities for its users or society more broadly? And what does the company do to mitigate those externalities?” It’s a really important question to dig deeper on.
And then the third one is “Does the company actually engender trust?” And that trust could be with its customers. It could be with its employees and then, ultimately, society at large. Because if you don’t have trust among those three major constituents, you can end up having significant regulatory challenges, for example. And through that lens, I think that really gives you a qualitative assessment and a common lens by which to debate issues and particular businesses.
So if you take that lens and apply it to a company like Facebook, in the case of Facebook on the positive side of the ledger for society: I think a lot of people are already aware about its ability to create connections among consumers, and so it really won’t touch on that. But one of the parts that often does get less mentioned, but I think is very important, is the positive benefits that it provides for small and medium sized businesses. It truly has empowered millions of advertisers to create direct-to-consumer relationships and build those businesses.
And so that’s on the positive side of the ledger. Now I think what we’re all increasingly aware of is some of the externalities being created on the negative side of the ledger, right? That’s, I think, just to zoom in on one that I think society more broadly cares about. And then, also, just as an individual, I’m a father of three daughters, and there’s a significant awareness and concern about what the use of Facebook may be doing to a subsegment of the teenage population and externalities it’s creating there.
And so, I think the big question is what can Facebook do going forward to help mitigate those externalities? And is it doing enough?
And it’s just not. It’s actions of commission, but also omission, right? And so, I think that’s a subject that we’re debating very rigorously internally right now. But I think it’s a very important question to be asking about it or about a business like Facebook. And that relates to the third question around engendering trust. Because with a company at the scale of Facebook, as global as it is, in the very early days, you know, many of us hadn’t seen a social network scale to that extent on such a global basis.
And so, there’s almost an element of you could forgive in the early days that they didn’t understand all the permutations of how it could impact user behavior. But the longer that’s gone on, the more at risk there is about engendering trust with its own employee base. Will it be able to recruit the best talent? Could this impact user engagement and then ultimately, could it impact the regulatory environment as well? And so, I think that lens is important.
I do think there’s positives and negatives associated with Facebook on each one of them, but clearly in terms of their ability to mitigate externalities and their ability to engender trust, those are two of the biggest issues that Facebook is facing right now.
And to wrap up your earlier question about stock returns and good or bad actors: I think what happens is a company can have a vulnerability for a while, but the vulnerability turns into a crisis when there is an intersection of that vulnerability with some sort of external event. And we’ve seen a number of external events associated with Facebook that is now turning that vulnerability into a much, much bigger issue for the company. And without solving that, I think that’s when you have, you know, poor actions. Bad actors can then end up leading to poor stock outcomes.
So I think the real question is if they don’t solve these issues, what would that investment return look like over the next decade? I think it’ll probably look very different than the prior decade. So those are the types of issues that we’re very much zeroed in on.
KEVIN: Excellent. Yeah. And it’s a nuanced case in the Facebook example. There’s no kind of cut-and-dried white hat/black hat that you can point to. All points are very much debatable, which I think is the reason we probably still own it across a number of strategies.
But working on getting those answers is important.
So thanks for sharing that.
As of September 30, 2021, Facebook represented 3.8% of the Select Growth Strategy weight, respectively, in the strategy composites. The company identified represents one holding in the Select Growth strategies and was selected based on the subject matter discussed. The views expressed by Sands Capital Management and the information contained herein are current as of October 14, 2021 and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. The specific portfolio holding identified and described does not represent all of the securities purchased, sold, or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio or that securities sold have not been repurchased. You should not assume that any investment is or will be profitable. GIPS® Reports and additional disclosures for the related composites may be found in the Sands Capital GIPS Report.