Corporate Governance: Lessons Learned From Uber’s Board

Uber’s recent corporate governance reforms should serve as “a cautionary tale” about giving super-voting shares to certain board members, says one governance expert.

The San Francisco-based ride-sharing service company’s board this month agreed to a number of reforms, including a one-vote-per-share policy, which reduces the voting power of former chief executive Travis Kalanick and other early shareholders. Kalanick resigned in June under pressure from an Uber investor group led by Benchmark Capital over employee sexual harassment investigations, a trade-secrets misappropriation lawsuit by Waymo and efforts to interfere with government probes.

The board also agreed to require a two-thirds majority vote to hire a replacement for Dara Khosrowshahi, who stepped in as Uber’s CEO in September, after serving in the same position at Expedia Inc. The governance change is widely seen as a move to prevent Kalanick from returning as CEO.

The reforms were enacted to keep the multi-billion dollar investment by Japan’s SoftBank Group Corp. The terms preserve Uber’s $69-billion valuation, as SoftBank and others invest about $10 billion.

“The boardroom changes at Uber were driven by a dysfunctional governance structure—board members were split and some early-stage investors demanded that Kalanick give up some of his control.”

Patrick McGurn, special counsel and head of strategic research and analysis at Institutional Shareholder Services, says that Uber presents a “cautionary tale” about the inherent conflicts of interest that accompany the adoption of unequal voting rights schemes.

“Super-voting shares held by Kalanick were obstructing reform at the company and threatened its long-term survival,” McGurn says. The boardroom changes at Uber were driven by a dysfunctional governance structure—board members were split and some early-stage investors demanded that Kalanick give up some of his control, he says.

“I don’t think the company would have been able to secure the Softbank investment if the board had not leveled the playing field,” McGurn says.

Unequal voting rights are popular in some sectors, including Silicon Valley, he says. For individuals who are considering joining pre-IPO companies’ boards, Uber is a prime example of the problems that can occur when vesting founders with control via superior voting rights.

“Board members should probably think twice before putting themselves in such difficult situations, since there may not be a willingness by founders to surrender their control,” McGurn says.

Uber’s board also agreed to expand from 11 directors to 17 directors, increasing the number of independent directors to seven. Five board seats would go to company insiders or co-founders, and five would be representatives of investors—two of which go to SoftBank, according to sources. The chairperson would be one of the independent directors.

McGurn says that Uber now has “a new problem”—its 17-member board.

“Big boards can have problems reaching consensus,” he says. “Large boards typically end up delegating critical issues to committees. This can reduce the effectiveness of the board as a whole as directors rubber-stamp the committees’ decisions.”