Page 72 - Harvard Business Review (November-December, 2017)

Given the extraordinary power imbalance that’s capital) about the trade-offs between ethical issues,
now the norm in Silicon Valley boardrooms, it should
be no surprise that many founder-CEOs are behaving
badly. In fact, the real surprise may be that so many of
them still behave well.
FIXING A BROKEN SYSTEM
o what should we do?
S the problem. To be clear, I’m not saying
The first step is to recognize and define
that founders should not or cannot become
high-performing CEOs; we see any number
xamples—notably Jeff Bezos—of ones
of e
who have. [See “The Best-Performing CEOs in the
World 2017,” in this issue.] Rather, this is a problem of
too much control and not enough oversight. Pre-IPO
companies like Uber are becoming much larger but, by
staying private, avoiding many of the regulatory and
governance requirements that public companies face.
For context, Uber currently has a $50 billion market
cap (on par with Monsanto and General Motors) and
12,000 employees (comparable to McKinsey & Co.).
Mary Jo White, then the SEC chair, described the
problem in a 2016 speech at Stanford. “As the latest
batch of start-ups mature, generate revenue, achieve
significant valuations, but stay private, it is important
to assess whether they are likewise maturing their
governance structures and internal control environ-
ments to match their size and market impact,” said
White, who suggested asking a list of questions: “Is
your board expanding from founders and venture
seats to include outsiders with larger, and ideally pub-
lic, company experience? Do you have the right reg-
ulatory and financial expertise on your boards to ap-
propriately make decisions on behalf of all investors?
Do you have the relevant expertise in the particular
industry in which your company functions to bring
to bear different viewpoints and spot critical issues?
Is your company, in short, being run and governed
for the benefit of all of your investors—a requirement
whether the company is public or private?”
To White’s insightful questions, let me add several
suggestions. First, even as “founder friendly” VCs opt
to allow founders to remain on as CEOs, they should
aggressively adhere to the best practice of pairing
those leaders with strong, experienced chief operat-
ing officers—and this should be done before the CEO
suffers a misstep, not as an after-the-fact remedy, as
at Uber. Facebook hired Sheryl Sandberg as COO just
four years after its founding and four years before
its IPO; her partnership with a very young technical
founder has been exemplary. Getting this hire in place
should be a standard part of scaling up a company—
and a prerequisite for subsequent rounds of funding.
Second, the general partners who are the active
leaders of VC firms should engage with their limited
partners (the institutional investors who put up the
heightened agency risk, expected returns, and the
amount of power and control they are ceding to found-
ers. Do the LPs expect firms to invest in unicorns de-
spite concern over the treatment of employees, a lack
of diversity, or questionable behavior toward regula-
tors and other authorities? Is it acceptable for a VC to
say, “We think this will be a great, valuable company,
but we’re going to pass on investing because of con-
cern over these issues”? Similarly, VCs should consider
establishing a formal policy regarding their willingness
to invest in companies where the founder has voting
control. If several prominent VCs decided not to in-
vest in companies with dual-class shares, for instance,
the practice might abate. Better yet, VCs might work
through the National Venture Capital Association or
some other industry group to try to implement broad
guidelines; this cooperative approach would avoid
putting any one firm at a competitive disadvantage
because it went first.
Third, everyone in Silicon Valley should read the
recommendations Eric Holder delivered to Uber’s
board—in particular, the section on enhancing board
oversight. Holder suggested that Uber add additional
independent directors; install an independent board
chair; increase the size, role, and independence of
its audit committee; and create an oversight board.
Again, these steps should become the norm as a com-
pany grows—not something done in response to a
crisis or a black eye.
Finally, everyone involved should recognize the
lessons conveyed by the Uber story. The Wall Street
Journal chronicled how, despite Kalanick’s control of
voting shares and board seats, the venture capital firm
Benchmark persuaded four other large Uber inves-
tors to sign an ultimatum asking the CEO to resign. If
Kalanick refused, the investors would publicly release
the letter, putting the onus on directors to continue
defending him. Within hours Kalanick e-mailed em-
ployees to say he was leaving. Weeks later, Benchmark
sued Kalanick for fraud, breach of contract, and breach
of fiduciary responsibility; the complaint focuses on
Kalanick’s control over Uber’s board makeup.
Even as Uber’s governance problems illustrate how
a founder’s power can go too far, Kalanick’s dismissal
serves as an important reminder: No matter what a
board’s composition or who holds how many voting
shares, a determined and cohesive group of share-
holders can still effectively wield soft power. More of
them should consider doing so to offset the power im-
balance that has become prevalent in the boardrooms
of Silicon Valley. HBR Reprint R1706F
STEVE BLANK is an adjunct professor at Stanford University, a
senior fellow at Columbia University, and a lecturer at the
University of California, Berkeley. He has been either a cofounder
or an early employee at eight high-tech start-ups, and he helped
start the National Science Foundation Innovation Corps and the
Hacking for Defense and Hacking for Diplomacy programs.
NOVEMBER–DECEMBER 2017 HARVARD BUSINESS REVIEW 101