In June, 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. 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.
As is often the case, it is the editorial board at the FT which has some of the best advice for businesses, both in the UK and the US. In a piece entitled “At Uber, counting the cost of winner take all” the paper said, there are three groups which can influence the behavior for Uber going forward: the company’s owners, largely Kalanack and his cronies; the Board of Directors, think about Bonderman at this point; and its customers, IE., you and me. As to the final group, we can vote with our pocketbook by changing over to other ride-sharing companies such as Lyft.
Most importantly, the Uber ownership structure is a forbearer of ownership being concentrated in the hands of a few key founders. If they do not put compliance and ethics into the ethos of the company at an early phase, they cannot be forced to do so by shareholders or investors. This anomaly will make independent Boards of Directors more critical for getting such companies ready to go public. For if such companies cannot meet the requirements of a public company, everyone loses.
What role did the Uber Board play in its culture disaster and what role must it play going forward?Click to tweet
© Thomas R. Fox, 2017