Good governance may be Uber’s saviour
Uber’s strong corporate governance framework could help it perform better in the future
Uber has had one of the worst-performing initial public offering (IPO) in US history. Its shares fell 7.62% on the first day of trading, last Friday, and fell a further 10.86% on Monday.
There are myriad reasons for this underperformance, most relating to skepticism that the currently unprofitable ride-hailing company could turn a profit any time soon.
The underperformance begs the question: is Uber similar to the many tech IPOs with entrenched management structures that protect their CEOs and directors from discipline? Or, could Uber’s governance structure provide avenues for shareholders to turn the company’s management around?
It turns out Uber has several strong governance advantages, especially over other listed tech firms. These range from all shareholders having equal voting rights, to the lack of a poison pill, and restrictions on board business. This could enable management reform. Of course, good governance alone will not fix a broken business model but it could help nudge management in the right direction.
No dual class shares
Uber has said it will not have a dual-class share structure. A dual-class (or multi-class) structure is where a firm issues multiple classes of shares. Typically, one class has significantly more voting rights than the other class (or classes). Snap Inc., Snapchat’s parent company, is an extreme example; it issued shares with no voting rights.
Dual-class structures are generally value-destroying. The voting shareholders are typically aligned with founders or CEOs and are often ‘owned’ by those CEOs. This makes it difficult for other shareholders to vote out directors or vote on governance regulations at general meetings. In effect, they cede control to the CEO. This entrenches the CEO and limits the influence of external oversight or monitoring and prevents shareholders from disciplining underperforming CEOs.
The academic evidence generally paints a negative picture of dual-class structures. Broadly, dual-class firms tend to create less value from investments, but they pay their CEOs more money. This suggests dual-class structures exacerbate potential agency conflicts.
No poison pill
Uber’s US Securities and Exchange Commission filing explicitly states it will not have a poison pill. In theory, it could adopt one later. However, this would need to be well after the IPO otherwise the IPO prospectus could be deemed misleading and give rise to a class action.
Poison pills enable companies to resist takeover offers. They allow existing shareholders to obtain deeply discounted shares in their own company if a potential acquirer obtains more than a certain number of shares. This dilutes the acquirer’s position and makes the takeover costly-to-impossible. Typically, the board can waive the poison pill if they approve of the takeover bid.
Takeovers can act as a useful disciplinary mechanism. Typically, in a hostile takeover, under-performing managers are removed and replaced with better quality managers. The threat of removal encourages managers to perform better to avoid losing their job. Removing this disciplinary mechanism via a poison pill affects shareholders in two key ways: firstly, they lose the power of an implicit threat of managerial job loss if a company is taken over, and secondly, they lose one way to remove underperforming managers ex post.
The academic evidence tends to suggest poison pills and similar provisions lead to poorer investment decisions by managers. For example, being entrenched in the job might encourage managers to exert less effort. Additionally, it might enable managers to make self-interested investments that further entrench their position while not creating shareholder wealth.
No classified board
Uber has said it will not have a classified board, that is, a structure under which only a portion of directors are up for election each year. Typically, there will be two or three classes of directors, meaning that only half, or one third of them are up for election in any year. In contrast, on a unitary board all directors can be voted out in any year.
Classified boards generally aren’t good for shareholders. Firstly, they make it more difficult to remove underperforming directors because they are up for election less frequently. This damages the board’s oversight function and can instill complacency in directors. Secondly, classified boards can hamper takeovers. One way to facilitate a takeover is to vote out those directors who might be resisting the takeover for self-interested reasons. This is slower and more difficult to do if the board is classified because multiple elections are needed to replace directors. So, Uber’s decision to forego a staggered board is generally a positive move.
Limits on directors
One concern with independent directors is that they can be distracted by the obligations associated with other corporate positions they hold. Uber has explicitly stated it will not allow “directors to serve on more than four other public company boards, or more than one other public company board if the director is also our Chief Executive Officer or the chief executive officer of another public company”.
The evidence suggests that experienced directors are helpful because they impart knowledge to the board and can learn from their other corporate positions. However, very busy directors create less value when they start to devote more time to the boards they deem more important.
Uber has also said it will have an independent board chair. This is subject to change as the chair is not a permanent role. But in broad terms, this is a positive move. Institutional investors tend to prefer an independent chair because the chair notionally has responsibility for matters such as board meeting agendas and schedules, potentially preventing a CEO from co-opting the board and reducing its ability to monitor and oversee his or her actions. However, having an independent chair is not essential, with some companies performing well despite the CEO also being the chair, for example, J.P. Morgan.
Taken together, these governance structures could help Uber perform better. Good governance alone will not mitigate poor strategy, but it can help to push a company in the right direction.
Mark Humphery-Jenner is an Associate Professor of Finance at UNSW Business School