Leadership crisis

Why the leadership at Uber, Snapchat and Twitter looks weak and wobbly

Tech firm CEOs keep control by holding investors at arm’s length. It is damaging corporate governance.

Silicon Valley has not had a great year for governance, and ride-sharing business Uber has been struggling more than most. The company’s culture has come under sustained attack for macho and sexist elements leading CEO Travis Kalanick to fire staff and hire brand image specialists in a bid to convince the world the company is cleaning up its act.

Now, the Uber board has adopted a series of recommendations designed to address the firm’s culture and practices. Details of the report from former US attorney general Eric Holder, were not initially revealed, but it has already sparked the departure of senior vice-president Emil Michael, an ally of Kalanick. Some reports have suggested Kalanick could be asked to go on leave for a spell himself.

It’s not the only bump in the road. Uber was forced into a costly exit from China where it had spent at least $2 billion. And Google is now suing them for driverless car patent infringement and the alleged theft of secrets. The business continues to lose money and local competition is strengthening in many of Uber’s markets. Simply put, would Kalanick still be there if he did exert tight control over the privately-held shares and was able to block any uprising?

There have been issues too over at Snap Inc, owner of social network Snapchat. The firm has tried to explain poor performance since it floated its shares by complaining that Facebook is copying everything it does – hardly unusual behaviour in competitive markets. After the float, CEO Evan Spiegel immediately gave himself $750m of stock and his colleagues the rest of $2 billion stock, all without qualifying loyalty restrictions.

So what is going on with leadership among the tech elite? This last year, social networks LinkedIn and Twitter, and internet giant Yahoo, have all put themselves up for sale after attracting substantial user traffic which they failed to monetise. Are these also leadership failures?

Keeping control

Perhaps one clue lies with Snap, which floated at a valuation exceeding $20 billion when its 2016 revenue was just $400m, losses came in at more than $500m and its user growth was slowing. Investors were essentially buying a lottery ticket as the issued shares did not carry votes. This meant they would have no influence over strategy or on the leadership, or, indeed, on what the leadership choose to pay themselves. The 26-year-old Spiegel and 28-year-old chief technical officer, Bobby Murphy, have a tight grip on control through their voting founder shares. Clearly whatever the future for Snapchat, they won’t be leaving in a hurry.

It is rare that entrepreneurs continue to lead their business once it moves into a strong growth phase and achieves maturity. The need for funds to develop the business requires outside funding which, due to the extent of risk, is provided by venture capital in return for voting equity. In turn, they usually move aside the entrepreneur to a product development role to be replaced by a more experienced CEO who can manage the introduction of systems, processes and structure.

The CEO will also have the delicate job of managing stakeholder interests and business reputation. Through experienced CEOs and chairmen, shareholders can ensure the rapid development of the business without major distraction through unproductive diversification or impulsive lurches towards high-risk business areas.

A business goes through various stages. From start up to rapid acceleration; to maturity, perhaps a turnaround, and for many, eventual demise. Each stage creates very different demands for leadership which are usually met by different leaders with appropriate skills for the stage the business is in.

Entrepreneurs rarely make it through the acceleration phase to maturity. That’s the point at which point most businesses recruit an outside CEO. Mark Zuckerberg at Facebook and Bill Gates at Microsoft were significant exceptions to that rule. However if entrepreneurs can retain adequate voting rights to block any challenge, then they typically hang on to power as long as they can. There are plenty of exceptions, but these norms are quite persistent.

Investor power

Jack Dorsey is a serial founder of technology businesses including Twitter and, more recently, Square. He has held the CEO role at both Twitter and Square at a time when Twitter has struggled. User growth has only very recently shown any sign of rallying, and the share price has stagnated. As investors are unlikely to contribute further funds, a first round of redundancies totalling 10% of staff has just been completed. These may not be the last. Meanwhile Dorsey is promoting his more recent interest in Square, which processes card payments and in which he is believed to hold about a quarter of the equity.

No one disputes Dorsey’s entrepreneurial eye for technology opportunities or ability to rapidly exploit opportunities. But can he deliver two long-term, thriving, focused businesses which know what they are good at? He may be a serial starter of businesses, but should he be running failing mature businesses when clearly his interests are elsewhere?

Whatever your answer to those questions, at least Twitter and Dorsey, and co-founder Ev Williams, have put in place a one share one vote structure. Elsewhere, Silicon Valley investors appear to have accepted the new norm of buying shares which lack the rights to dislodge the CEO if performance is failing. Uber remains privately held and so management retains control, but many public tech sector floats – including Google, Facebook, LinkedIn, and now Snapchat – protect the founders with either protective article clauses or privileged shares. So why are investors willing to pay for shares, in private companies or public, which have limited rights?

We can look back to the global financial crisis for the fundamental reason. The era of cheap money and low interest rates that followed has made it almost foolhardy to watch as your money stagnates in the bank. A ticket in the lottery, even with very long odds, is tempting for investors hoping for another Amazon, Google or Facebook, even if they are setting themselves up for longer term disappointment. Silicon valley investors should be ready to assert their power as the money behind tech sector growth. Voting rights would keep mercurial founders on the straight and narrow, work in those investors’ best interests – and make corporate governance less of a lottery while we’re at it.

John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of Warwick.

This article first appeared on The Conversation.

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