In an article in Bloomberg by Becky Peterson, entitled “Uber’s first employee and one of Travis Kalanick’s last allies has left the company’s board just 2 weeks after IPO”, she reported, “Ryan Graves, Uber’s first-ever employee and its former CEO, has stepped down from the board of directors just two weeks after the ride-hailing company’s massive initial public offering. In a statement filed with the Securities and Exchange Commission, the company said that Graves is not stepping down over any disagreement with the company, its management, its board, or any other matter related to Uber’s operations, policies, or practices. It’s unclear why he resigned. His resignation goes into effect on May 27.”
I thought about this and the precipitous drop in the value of Uber stock since it has gone public and believe now is the right time for Uber to put someone with compliance expertise on its Board of Directors. While the company has made great strides cleaning up the mess left from the CEOship of Travis Kalanick, there is still much work to be done. This is in addition to the ongoing Foreign Corrupt Practices Act (FCPA) investigation. Given the prior corporate culture and tone at the top of Uber, it is not difficult to believe the company may have indulge in some FCPA violations.
My thoughts on this issue were sharpened by an article I recently ready by Henry D. Wolfe, writing in a Corporate Compliance Insights piece entitled “Focus on Competence, Not Independence, to Solve Problem with Director Selection at Public Companies”. He wrote that today’s public company governance model is based on one key criteria. He found the “primary selection criteria for boards is “independence,” based on mandates established after a handful of scandals including the collapse of Enron around 20 years ago. By all accounts, this focus on independence originated with benevolent intentions; however, it has devolved into “independence for independence’s sake,” creating boards that underperform relative to their potential.”
The problem which Wolfe succinctly states is, “What is glaringly missing from public company board selection criteria is competence.” However, it is not simply any competence, it is specific subject matter compliance. Wolfe noted that simply “because an individual is or has been a CEO does not mean that he or she has the right experience and track record to serve on a particular board. Instead, if the intent is to maximize the asset value of the board rather than it serving as an underperforming oversight body, then the competence needed for public company boards is far more specific. And for each specific category, the right candidate should have not just experience; he or she should also have an extensive track record of performance increases and value creation in the particular category.”
For clarity, the intent is not for each director to have the experience and track record in all three categories. Instead, one or more directors should fall into the “industry” category, one or more into “specific value drivers” and so on. The following, at a minimum, are the categories for director selection:
- The company’s industry – This should be recent experience and track record. The pace of change is too rapid for value to be derived from roles in the distant past.
- Specific value drivers – Look for directors with experience and track record in a field or discipline that is critical to the company’s value maximization plan. On most boards, there will likely be a need for different directors that have the talent needed relative to the company’s major initiatives and value drivers.
- General value creation – As an example, the best private equity professionals have experience and track record of value creation, including capital allocation, across multiple businesses and industries, and that is one of the many reasons why the private equity portfolio company governance model is so robust. PE executives are not the only individuals who have this talent, but they provide a good example of this essential director competency.
To say that the Uber Board of Directors was asleep at the switch around compliance is unfortunately putting it mildly. They do not and still do not have compliance expertise at the Board. Now every Board of Directors need a true compliance expert at the table. Almost every Board has a former Chief Financial Officer (CFO), former head of Internal Audit or persons with a similar background and often times these are also the Audit Committee members of the Board. Such a background brings a level of sophistication, training and subject matter expertise (SME) that can help all companies with their financial reporting and other finance-based issues. So why is there not such compliance SME at the Board level?
An arm of the US government has recognized the need for such expertise at the Board level. In 2015 the Office of Inspector General (OIG) called for greater compliance expertise at the Board level. The OIG said that a Board can raise its level of substantive expertise with respect to regulatory and compliance matters by adding to the Board, a compliance member. The presence of a such a compliance SME professional sends a strong message about the organization’s commitment to compliance, provides a valuable resource to other Board members, and helps the Board better fulfill its oversight obligations.
Over the past year, the Department of Justice (DOJ) has continually talked about companies operationalizing their compliance programs. Having a Board member with specific compliance expertise or 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 FCPA enforcement action resolution. This means that when your company is evaluated by the DOJ under the new FCPA Corporate Enforcement Policy, to retrospectively determine if your company had a best practices compliance program in place at the time of any violation, you need to have not only the structure of the Board level Compliance Committee but also the specific SME on the Board and on that committee.
The bottom line is that Uber needs compliance expertise on its Board. Wolfe’s article lays out the underlying intellectual basis for the need. Now Uber needs to step up and act like a grown-up company.
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© Thomas R. Fox, 2019