A friend recently interviewed with a startup where the senior management group was upset that the CFO was requiring receipts and documentation for the use of company credit cards. They had decided to replace the CFO because they didn’t want to be troubled by providing receipts.
Sooner or later this company – like so many others – will face reality. When and how they will face reality is unknown. They may run out of cash, suffer a major defalcation or the company is sold, goes public or matures and profits become tougher to obtain. Providing receipts will be the least of their problems.
Facing reality is what Uber is doing now. The Board finds itself without much of a senior management team, no back-up plan and a rapidly sinking investment valuation. Changing CEO’s isn’t easy – I’ve been through the drill a couple of times. Planning is essential and thinking probabilistically is critical.
Thinking probabilistically isn’t hard. Using a decision tree is a good way to start. The tree in this case might have had three branches depending on the outcome of the investigation. Branch 1 would be no or only a minor finding, branch 2 would be a significant finding and branch 3 a major finding. The odds of branch 1, no or a minor finding would be low, they’ve had steady turnover in the ranks and there have been a lot of negative disclosures, I’d estimate 15%. The odds of branch 2 “significant” would be high, I guess 60% . A significant finding would require some senior turnover and changes in the culture.
Hiring a big deal law firm and a consulting firm to probe 3 million documents and survey employees anonymously isn’t cheap. A significant finding is most likely. Finally the third leg would be a major finding where the top management team needs to be fired or a significant restructuring undertaken. That accounts for the remaining 25%.
When the CEO decided to have an investigation of sexual harassment claims in February, there was a distinct possibility that the result would be significant or worse. Facing a 25% potential turnover in the top management group should have focused the Board on a backup plan. When Mr. Kalanick’s mom passed in a boating accident at the end of last month the odds of turnover increased.
Review Covington & Burling’s report recommendations (see here) and then guess at what facts justified these recommendations. The first set of recommendations states that the CEO’s responsibilities need to be reassigned. The second set aims at Board governance; which should have figured out the problem in the first place. The recommendations suggest that they found significant problems with leadership. Uber is facing reality now.
We used to joke about managers who’d used the “force”. The “force” was an unreality field that surrounded the manager, and within that field they could manipulate facts and time to justify whatever they wanted to do. Eventually since there are not Jedi’s in business, reality catches up. I worked for a CEO who ran the business by anecdote even when we had facts. We spent months on the wrong strategies based on incomplete understandings. He’d repeat the same anecdotes in every meeting, certain of his rightness, even as the business crumbled. Reality didn’t penetrate until he was fired in a crisis. The company never recovered.
I am unhappy when capital is wasted, but I really dislike the toll the failure to face reality takes on the people who work for these businesses.
I worked for a company that opened up a Texas operations center, reproducing it’s California central office. The strategy was to be more local in sourcing. After a year or two, the CEO realized this was a bad strategy, and ended up shutting down the office. The sad part was one of the junior people who’d moved their life to Texas was so upset by the closing and the layoff, committed suicide. Obviously there were other issues in this person’s life, but as senior executives, we shouldn’t forget that decisions have consequences beyond return on capital.
VC’s and PE firms are focused on return of capital. Board members are usually required to do what is right for the company. VC and PE firms have come up with investment vehicles which absolve themselves of any fiduciary responsibility to the company. They are held accountable only to investors in their funds, not to other investors or stakeholders. Uber’s board had full confidence in Mr. Kalanick (see here) in March even while turnover of senior executives and the search for the COO continued. The company never hired a COO or a CFO and turnover still continues. All that being said, the “money” Board seats appear to be more rational than the founder’s board seats.
Uber’s board is dominated by the founders with super-voting shares (see here). This structure supports founders regardless of competence. Facebook and Google have this structure but they are primarily technology businesses. Uber is challenged because it is a people business, like Target or McDonald’s and the founders are not competent executives. Uber has 5-10x more employee/drivers than Facebook has employee/contractors, yet Uber is run like it is some sort of “two guys in a garage” startup. The non-founder portion of the Board has as little control as the drivers or employees do. The Board’s failure to take action makes sense, they are powerless. The board can either support Mr. Kalanick or be ignored.
Founderitis is a destructive disease to businesses. When a business outgrows it’s entrenched founder (through special voting shares) there will be a lot of pain, both for capital and for people. The VC’s and PE firms are well compensated for the pain and they don’t want or need my sympathy. My concern is saved for the thousands of drivers, workers, vendors and customers who will deal with the fallout.
Uber has been great for thousands of people. I like the service and it’s made the world a better place. But, I can make an argument that it has been poorly run from the perspective of: capital, management, stakeholders and ethics. Screwing up a company doesn’t just mean you’ve screwed the investors, it also means you’ve screwed customers, employees and vendors.
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Dr. John Zott is the principal consultant at Bates Creek Research & Consulting.
He is also the chair of the Careers Committee at FEI Silicon Valley, a senior adjunct professor at Golden Gate University and comments regularly on issues that affect growth businesses. If you are looking for a CFO for your consumer company, or are a former student, colleague or would just like to connect – reach out.