On Tuesday, the law firm of Covington & Burling LLP (Covington), released its long-awaited report (Report) to the Special Committee of the Board of Directors of Uber Technologies, Inc. (Uber). It is truly one of the most unique corporate documents you will ever see. Over the next couple of blog posts, I will be considering the Report and what it means for the Chief Compliance Officer (CCO), compliance practitioner and indeed the entire compliance profession. Today, I will consider the corporate governance suggestions, Board Ethics committee proposal and the recommendations to tie some portion of executive compensation to ethics and compliance.
The Report was commissioned after Susan Fowler, a former engineer at Uber, published a blog post detailing allegations of harassment, discrimination, and retaliation during her employment at Uber, and the ineffectiveness of the company’s then-existing policies and procedures. The next day, Uber retained Covington “to conduct a thorough and objective review regarding “the specific issues relating to the work place environment raised by Susan Fowler, as well as diversity and inclusion at Uber more broadly.””
According to the Report, Covington conducted over 200 interviews with current and former employees who shared a broad range of perspectives; interviewed individuals with knowledge of Ms. Fowler’s allegations; employees who reported workplace environment-related complaints; employee representatives of Uber’s affinity and diversity groups, and current and former members of the Senior Executive Team. The law firm also retained an experienced consulting firm to partner with them to convene and moderate anonymous, online focus groups with a statistically-significant percentage of Uber’s employees in the United States, gathering broad-based data about employee perceptions concerning Uber’s workplace environment and culture. Finally, the law firm conducted a document review that included searching databases containing over 3 million documents.
The Report is one of the most remarkable discussions of a complete workplace culture disaster that has ever been rendered for a multi-billion business. If you changed some of the business and legal language, you might well think you were reading a report on Animal House or some similar hard-partying fraternity from the 1970s or 1980s. Regardless, the state of culture, governance and internal controls at Uber can only be described as beyond abysmal. Some of the more salacious highlights included recommendations to prohibit “non-prescription controlled substances” (i.e. illegal drugs) “during core work hours, at work events or at other work-sponsored events.” Similar but additional prescriptions were recommended for alcohol use during “core work hours”, at company events and during company travel. Finally, the advice that “Uber should also encourage responsible drinking.”
Similar to the Shearman & Sterling report to the Wells Fargo Board of Directors, the Uber Board comes in for some direct criticism. In the area of corporate governance, the Report advises that the Board should have greater independence and the “additional Board members should be directors with meaningful experience on other boards who can exercise independent oversight of Uber’s management.” The Report also recommends Uber install an independent Chairperson who, “could address several of these recommendations, particularly the need to serve as an independent check on Uber’s management and the need to demonstrate to Uber’s employees, partners, and customers that the Board is taking the investigation and the need for governance reform seriously.”
The Report also stated the Board “could create an Ethics and Culture Committee” which would “oversee Uber’s efforts and enhance a culture of ethical business practices, diversity, and inclusion within the organization. The activities of the committee could involve meeting with senior members of management who are responsible for ethics, Compliance, Human Resources, and risk. This committee could establish and monitor metrics that are intended to measure compliance with Uber’s business values, and the promotion of an ethical and inclusive environment.” Yet apparently, there is so much work to do at Uber, the Report recommended, “Alternatively, this committee could focus solely on Uber’s remediation of recent issues.”
At the Board of Directors level, an Ethics and Compliance Committee can devote itself exclusively to non-financial compliance, such as setting a company’s ethical business culture and compliance with it going forward. While many companies have fulfilled these obligations through an Audit Committee, clearly the better practice is to have a separate Compliance Committee. The reason is clear, that compliance has become not only central to any well-run business but it is critical to overseeing a wider variety of risks than the typical Audit Committee has experience with, which is usually only aimed towards financial risks. The Board Compliance Committee should begin its inquiry with a basic: ‘How do we know it is working?’ and go forward from that point.
The Department of Justice (DOJ), has continually talked about the need for companies to operationalize their compliance programs. Businesses must work to literally burn compliance into the fabric and DNA of their organization. Having a Board member with specific compliance expertise, heading a Board Level Compliance Committee can provide a level of oversight and commitment to achieving this goal. It will not be long before the DOJ and Securities and Exchange Commission (SEC) begin to require this step in any Foreign Corrupt Practices Act (FCPA) enforcement action resolution. Under the factors set out in Prong Three of the FCPA Pilot Program, entitled “Oversight – What compliance expertise has been available on the board of directors?”, you need to have not only the structure of the Board Level Compliance Committee but also the specific subject matter expertise (SME) on the Board and on that committee.
Finally, recognizing that compensation can be a powerful motive to induce ethical and even business appropriate behavior the Board recommended that it use compensation to hold senior executives accountable by “incorporating ethical business practices, diversity and inclusion, and other values from Uber’s Business Code of Conduct into its executive compensation program. This compensation program would be coupled with training on the company’s revamped ethical business practices, diversity, inclusion and other key corporate values.
Both the DOJ and SEC have long recognized, as they stated in the FCPA Guidance, “positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.”
The power of an ethics and compliance compensation plan can act in ways that support a start-up’s evolving business model and overall strategy going forward. The Report recognizes that the first job of the Uber Board will be to change the company’s culture to make ethics and compliance more important and then burn it into the fabric of the organization. Making it a part of compensation can assist in doing so.
Tomorrow I will consider the Internal Controls section of the Report and where Uber might be headed going forward.
The Holder Report on cultural, governance, Board, leadership and control failures at Uber should be studied by every CCO.Click to tweet
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© Thomas R. Fox, 2017