Facebook users have taken notice. According to an annual study by the Ponemon Institute, a privacy research firm, Facebook ranks within the top 20 (15th) most trusted companies for privacy as rated by U.S. consumers.

Kelly's job sometimes appears tricky, however. He must ensure that users feel they have control over their information, while weighing that need against Facebook's business model, which relies heavily on a culture of openness and sharing. Here is the full interview CIO conducted with Kelly during our reporting for a special feature on social networks and privacy. Kelly talked about what constitutes Facebook's overall view towards privacy, and how that affects its ability to serve up ads.

CIO: Facebook now has some pretty robust privacy settings. They allow users to determine who can see their profiles, and what bits of content each person can see within those profiles. But the question most people have is, "do people actually use them?"

Kelly: One of the things we've tried to watch is if people under-utilize the controls because they find them too confusing. We also launched friend lists, and we mapped those friend lists to individual privacy settings. We don't have any raw numbers to share, but we're not as satisfied as we'd like to be with how people are using those friend lists to make individual choices about what they share with whom. We'd like to see that be done more effectively, and we're doing some work on that right now.

Overall, we think privacy is fundamentally about user control of information, giving them the ability to choose being completely open with everyone if they want to be, or to select individual groups of people that they want to share a piece of content with, or even just individual people. We're trying to solve for all of those use cases, and make them all easy for users to select their own preferences about control over content.

CIO: How do you decide on the default privacy settings for Facebook?

Kelly: What we try to apply is the average user test. People are coming to Facebook to share information with others, and so some information has to be discoverable. With people that are more resistant about sharing information, particularly privacy commissioners, we get the question, "why didn't you set the defaults to the most conservative?" The answer to that is, well, people are coming to share, not to hide. So figuring out those defaults does become a bit of an exercise. As people incorporate more openness into their lives, over time we can allow for that evolution with them.

CIO: From Facebook's perspective, what's the upside to a user who frequently utilizes the privacy controls?

Kelly: There's a greater authenticity to their interactions online if Facebook users know who they are signaling their interests and activities to.

CIO: Is it more difficult to monetize a user that uses a lot of those privacy settings though?

Kelly: We've taken a different approach on advertising than we have on the sharing of information. We don't target advertising in the personal identifiable space at all. We've run through this in the privacy policy. The goal is to aggregate the information. What advertisers want is to be able to target at people who have attributes. So what we do is abstract profile information and the information flows of the site into keywords that advertisers can target their advertising against. But the advertisers don't get a list of who matches those keywords, so it doesn't really impinge upon the users' privacy interests.

It's an extraordinarily anonymous process. There are ten levels of hacking and activity that you'd have to use to extract that information back to someone. It's extremely difficult to do so. What our philosophy is in regards to users and advertisers interacting is that the user should be in control of that relationship. For example, if users are asked to enter a contest where they have to give their e-mail address, and the user wants to make that choice, we're fine with that. But it should be the user making that choice, not us or the advertiser.

CIO: During the recent Facebook redesign, users were flashed a message on the top of their home pages for a week or two informing them that the change was coming. How do you keep users informed of privacy issues?

Kelly: That's one ways that we do it too. But one example of how we get the word out that I think was extremely effective was in the launch of public search listings. We actually hadn't made any Facebook content available yet in search engines, and we wanted to give users the choice as to whether or not anything would be made available.

So we did those sort of homepage announcements for users who had their Facebook search set to "everyone." We said to those users, "because your search is set to everyone, in 30 days we're going to create public search for you because we think that reflects your preference, but click here if you want to change that." And for those users who had their search settings restricted, we said, "we're launching this thing called public search listings. We think they'll be useful to a lot of people, but because you've restricted your search already, we're not creating one for you. Click here to see what it is and if you want one."

So in that case, we announced what we were going to do, we gave them a time period to choose and experience what that might mean, and then people made their own choices. That's what we've tried to do with our privacy settings as they evolve.

CIO: Now that the Facebook launched Facebook Connect, people will be taking their Facebook identity with them around the Web. Will their privacy settings on Facebook extend to the other websites they visit using their Facebook user name and password?

Kelly: Absolutely. It's one of the key features of Connect and how Connect differs from most approaches of how to do single sign-on and identity across the Web. That connection back to your Facebook privacy settings and the ultimate respect of those through that process on thousands of websites is an incredibly powerful advantage.