Governance Gone Wild: Misbehavior at Uber Technologies

We recently published a paper on SSRN, Governance Gone Wild: Epic Misbehavior at Uber Technologies, that evaluates governance and leadership challenges through the example of the private ride-sharing startup Uber.

Despite its importance, there is surprisingly little consensus among researchers about the organizational attributes that are critical for “good” corporate governance. Research generally shows that the structural features of a governance system—the size and structure of the board and the implementation of so-called best practices for audit, risk, compensation, and succession—do not have a reliable (positive or negative) impact on firm performance and outcomes. Some research finds that the human elements of governance—such as leadership, culture, and tone from the top—do influence outcomes, but these are difficult to measure and assess with accuracy.

Research also finds that companies that engage in misbehavior tend to exhibit repeated problems over time (known as recidivism). This suggests that bad governance might be systemic. However, it is not clear what roles leadership and culture play in contributing to chronic misbehavior and the manner in which it spreads throughout an organization. Nor is it clear, once the culture is formed, how difficult chronic misbehavior is to correct. To illustrate these issues, consider the case of Uber Technologies.

The Culture and Growth of Uber

Uber Technologies was founded in 2009 by Travis Kalanick, Garrett Camp, and Ryan Graves. Kalanick was a serial entrepreneur with a computer science background, having founded two companies prior to Uber, the latter of which he sold to Akamai in 2007 for $15 million. In 2009, Kalanick and Camp conceived of the idea of a smartphone app that could be used to order rides from private drivers on demand after the two experienced difficulty catching cab rides in San Francisco. Graves was briefly brought on as CEO before Kalanick took over.

The company offered two levels of service: UberBlack, which connected passengers with professionally licensed vehicle drivers (such as limousines and towncars) and later a lower cost UberX (and UberPop in some international markets) that connected passengers to drivers who did not have a professional license and used their personal vehicle on a flexible basis to transport passengers. Other companies soon copied Uber’s services, most notably Lyft which became Uber’s largest competitor in the United States.

From the beginning, Kalanick embarked on an aggressive campaign to dominate the ride-sharing industry, expanding first across the U.S. and then internationally. By 2014—less than four years after launching its app—Uber was operating in more than 250 cities in 53 countries (see Exhibit 1). “It’s probably the fastest international expansion that I’ve ever seen from a venture-backed company,” observed an early investor. Revenue, which was $125 million in 2013, rose to $6.5 billion three years later (see Exhibit 2). In the words of an early employee, Kalanick’s focus was “growth above all else.” This mindset was reflected in the company’s 14 cultural values, which encouraged behaviors such as “always be hustling,’” “make magic,” and “toe-stepping” (see Exhibit 3).

Astronomic growth attracted high-profile investors. The company’s earliest venture-capital investor was Benchmark Capital, which took at 20 percent stake at the time, investing $12 million in Uber in 2011 and giving it a $60 million valuation. As the company grew, Benchmark retained its position as the company’s largest venture investor. Later rounds included big-name funds such as Summit Partners, Kleiner Perkins, Menlo Ventures, and Texas Pacific Group; mutual fund giants Fidelity, BlackRock, and Vanguard; technology companies Google, Alibaba, and Microsoft; sovereign wealth funds of Qatar and Saudi Arabia; and prominent individuals such as Jeff Bezos of Amazon. Uber’s 2016 fundraising round gave the company a valuation of $68 billion, making it the largest pre-IPO company in the U.S. (see Exhibits 4). All the while, Kalanick and his co-founders retained control through a dual-class share structure that gave them outsized voting power and the ability to name a majority of members of the board of directors.

Regulatory Challenges

Uber’s growth did not come without friction. Almost from the beginning, Uber encountered resistance in practically every market it entered from regulators, transit authorities, and established taxi, limousine, and private-car operators. For example, four months after launching its service in San Francisco, the company received a “cease and desist” order from city and state authorities. Because the existing framework was designed to regulate private car operators and not third-party service providers that connected passengers with licensed vehicles, it was Uber’s position that it was not in violation of the rules. An early interview with the Wall Street Journal encapsulated the company’s viewpoint:

WSJ: Did you ever cease?

Kalanick: No.

WSJ: Did you ever desist?

Kalanick: No.

WSJ: So you basically ignored them? […]

Kalanick: The thing is, a cease and desist is something that says, ‘Hey, I think you should stop,’ and we’re saying, ‘We don’t think we should.’

The company repeated this formula in cities around the world: Build a critical mass of drivers and passengers. If local authorities challenge Uber’s legality, continue to grow while arguing that your services should not be restricted by ambiguities and omissions in the regulatory framework. Eventually, the user base of passengers and drivers will achieve sufficient size that regulators will not be able to curtail operations.

Nevertheless, Uber’s aggressive approach created local resistance in numerous markets. Taxi drivers in London, Paris, Berlin, and other European cities staged protests by refusing to provide services, converging in major traffic centers, and driving at very low speeds on thoroughfares to disrupt traffic. “These car services are doing the same work as taxis, but without the same constraints,” said one driver. “It’s unfair competition.” According to another, “In the 24 years I’ve been a cab driver, my future has never been in so much danger.” Protests had the unintended consequence of increasing public awareness of Uber’s low-cost services, and in many cases usage soared.

In New York City, local officials sought to impose a cap on the number of Uber drivers, arguing that Uber vehicles were responsible for worsening traffic. Officials proposed a cap of 200 new Uber licenses per year. At the time, over 20,000 Uber vehicles were operating in the city, already larger than the 13,600 yellow taxis. Uber instigated a grassroots campaign of passengers to complain that wait times would soar, and the city backed down. Meanwhile, the price of medallions required to operate a taxi fell from a peak of over $1 million to $500,000 in just a few years (see Exhibit 5).

In Paris, officials sought to contain Uber by enacting a rule that required car services (other than licensed taxis) to wait at least 15 minutes before picking up a passenger. Exceptions were made for pickups at four-and five-star hotels. Uber flouted the rule and offered to pay fines and provide legal support to drivers who were caught. A government representative said, “Uber simply doesn’t respect regulation.” According to a competitor, “They don’t even make any effort to comply with what they think are bad laws.” An Uber lobbyist responded: “If every time somebody wants to ban us, we just go along with that, we wouldn’t be in business.” Fed up, the French government declared that operating a ride-sharing vehicle without a professional license was illegal, punishable by two years in prison and a €300,000 fine. Prosecutors indicted Uber’s two top executives in Paris, convicting them of violating transportation laws and fining the company €800,000. A French lawmaker told Uber, “We’re not going to let you come in here like cowboys.” Uber capitulated and suspended its UberPop services.

Still, the company’s challenges compounded. Germany imposed a nation-wide ban on UberPop. South Korean officials indicted Kalanick and other Uber executives for violating public transportation laws. Johannesburg impounded the vehicles of 33 Uber drivers. London officials declared Uber unfit to operate, citing a “general lack of corporate responsibility.” Uber pulled out of Austin, Texas after residents voted to keep in place restrictive regulatory measures. The company suspended operations in China and swapped its business for a 20 percent stake in its largest competitor.

Reputational and Other Challenges

Uber’s challenges, however, were not limited to endless battles with regulators. Over time, competitive, operating, and governance problems popped up like a game of whack-a-mole that the company struggled to keep down, including the following:

Relation with Drivers. Uber’s relation with drivers deteriorated following a decision to alter the company’s revenue-sharing formula—with Uber taking as much as 30 percent of gross fare revenue (depending on driver volume), up from 20 percent previously. The change followed a separate decision to reduce gross rates in major cities as part of a price war with rival Lyft. The dual moves translated into a significant reduction in the effective hourly rate that drivers could earn. Thousands of drivers sued the company in a class-action lawsuit alleging that they should be classified as employees, rather than contractors, and as such were entitled to benefits. The company’s proposed $100 million settlement was thrown out by the courts, but drivers continued to pursue claims individually through arbitration.

Self-Driving Technology. In 2014, Uber poached 40 researchers from Carnegie Mellon’s robotics department to bolster its self-driving vehicle program. A few years later, it purchased a company founded by the former head of Google’s self-driving vehicle division, Waymo. Waymo sued Uber, alleging that the company knowingly colluded with the executive to steal 14,000 confidential documents from Waymo before leaving to start his own venture. The judge overseeing the case took the highly unusual step of recommending that federal prosecutors open a criminal probe, a decision that opened the door to potentially severe individual and corporate punishment.

Regulatory Evasion. In 2017, the New York Times reported that Uber secretly used information from its app and other data to identify and thwart officials attempting to cite drivers in cities that did not authorize UberX or UberPop. The tool—called Greyball—allowed Uber to show that no cars were available for pickups in specified locations. In a statement, Uber said that Greyball

“denies ride requests to fraudulent users who are violating our terms of service—whether that’s people aiming to physically harm drivers, competitors looking to disrupt our operations, or opponents who collude with officials on secret ‘stings’ meant to entrap drivers.”

Uber curtailed the program.

Cybersecurity. Uber’s driver registration system was hacked in 2014, exposing the names and driver’s license numbers of 50,000 Uber drivers. In 2016, the company’s systems were hacked again, compromising the names, emails and phone numbers of 57 million riders and 600,000 drivers. The data breach was hidden from the pubic for a year; furthermore, Uber paid the hackers $100,000 to conceal the data breach. The company settled with the Federal Trade Commission and agreed to undergo a third-party audit every 2 years for 20 years to certify that it was in compliance with data-privacy protection requirements.

Passenger Safety. The company battled a string of headlines involving crimes committed by Uber drivers, including the sexual assault of a passenger in Washington, D.C. and a shooting spree in Michigan in which an Uber driver killed six people and injured two others. The most high-profile incident involved the rape of a female passenger in New Delhi, India, which sent shockwaves through the country and led state authorities to ban Uber and other ride-sharing apps in the country. Worse, it was discovered that a local executive illegally obtained the woman’s medical records and shared them with Kalanick and other Uber executives under suspicion that her depiction of the crime was not accurate and the story was being exaggerated by a local rival to tarnish Uber’s reputation. The executive was fired and the woman sued Uber for breach of privacy.

Following these and other public mishaps, a grassroots public campaign spread through social media to #DeleteUber. During this period, Uber rival Lyft gained significant market share (see Exhibit 6) and received a $500 million strategic investment from General Motors. 

Challenges at the Top

2017 was the year that Uber’s governance challenges spread to the boardroom. It began in February, when a former employee accused Uber of failing to act against a manager who made unwanted sexual advances: “It was clear that he was trying to get me to have sex with him, and it was so clearly out of line that I immediately took screenshots of these chat messages and reported him to HR,” she wrote. “Upper management told me that he ‘was a high performer’ (i.e. had stellar performance reviews from his superiors) and they wouldn’t feel comfortable punishing him for what was probably just an innocent mistake on his part.”

Kalanick responded by saying, “We seek to make Uber a just workplace and there can be absolutely no place for this kind of behavior at Uber, and anyone who behaves this way or thinks this is OK will be fired.” He called the allegations “abhorrent and against everything Uber stands for and believes in.” Uber hired law firm Perkins Coie to investigate claims of harassment and separately hired former Attorney General Eric Holder and law firm Covington & Burling to run a parallel investigation into the company’s culture and practices.

Ten days later, Kalanick landed in hot water when Bloomberg published a video of him arguing with an Uber driver about the company’s rate reductions. The driver told Kalanick that, “People are not trusting you anymore,” to which Kalanick replied, “Some people don’t like to take responsibility for their own s***. They blame everything in their life on somebody else.” Subsequently, Kalanick issued an apology: “I must fundamentally change as a leader and grow up. This is the first time I’ve been willing to admit that I need leadership help and I intend to get it.” Uber announced plans to hire a chief operating officer to help Kalanick run the company.

Shortly thereafter, the two law firms announced the results of their investigations. Perkins Coie reviewed 215 staff complaints relating to discrimination, sexual harassment, unprofessional behavior, and bullying since 2012. It recommended Uber take disciplinary action in 58 of those cases (27 percent); more than 20 employees were terminated. Separately, Covington completed its report on Uber’s workplace environment and culture—which was based on more than 200 interviews with current and former employees and a database review of over 3 million internal documents—and made public its recommendations for leadership, governance, and workplace changes, including recommendations to reallocate some of Kalanick’s responsibilities to other senior executives, increase the number of independent directors, increase the authority of the chief diversity officer, offer leadership coaching to senior executives, and implement mandatory sensitivity training to employees (see Exhibit 7). It also recommended that Uber “reformulate” its 14 cultural values (see Exhibit 8).

Uber’s board of directors voted unanimously to adopt Covington’s recommendations. It also announced that Kalanick would take a leave of absence, during which time his responsibilities would be shared among a committee of 14 direct reports: “If we are going to work on Uber 2.0, I also need to work on Travis 2.0 to become the leader that this company needs and that you deserve.” Kalanick reserved the right to intervene on major strategic decisions.

It did not end there. Concurrent with Kalanick’s leave, board member David Bonderman was forced to resign after making a sexist comment during a company-wide meeting to discuss the findings of the Covington report. Soon after, board member Bill Gurley—partner at Benchmark Capital and long-time confidant of Kalanick—also resigned. He was replaced on the board by another Benchmark representative. Two weeks later, Benchmark, despite continued board representation, took the unprecedented step of suing Kalanick, accusing him of breach of fiduciary duty and seeking his removal from the board. The lawsuit sought to undo an agreement made between Kalanick and Uber investors in 2016 that expanded the board from 8 to 11 as part of a fundraising round and gave Kalanick control over those seats. Benchmark cited “gross mismanagement and other misconduct at Uber,” including Uber’s intellectual property violations against Waymo, the India rape incident, and sexual harassment allegations. The lawsuit took on particular importance because Kalanick had not yet filled those three seats, which were still empty. The board issued a statement that it was “disappointed that a disagreement between shareholders has resulted in litigation” and it “urged both parties to resolve the matter cooperatively and quickly.” Kalanick called the lawsuit “riddled with lies and false allegations.”

With the lawsuit ongoing, Uber announced that Dara Khosrowshahi, CEO of Expedia, would replace Kalanick as chief executive officer and assume one of the vacant board seats. Rumors circulated that Khosrowshahi was a compromise candidate, with Kalanick and supporters favoring former General Electric CEO Jeffrey Immelt, and Benchmark Capital and its supporters favoring HP Enterprise CEO Meg Whitman. Khosrowshahi had a long track record of success. During his 10-year tenure at Expedia, the company’s stock price increased more than six-fold; Khosrowshahi was one of the most highly compensated chief executives of an S&P 500 company, with a 2015 compensation package valued at $95 million (comprised largely of long-term stock awards). Perhaps more important, he was known for a diplomatic temperament. Upon accepting the job, he said, “This company has to change. What got us here is not what’s going to get us to the next level. […] If culture is pushed top down, then people don’t believe in it. Culture is written bottoms up.”

Change, however, came with one last curve ball. Kalanick made the unexpected announcement that he was appointing two directors to fill the remaining vacant board seats that he controlled: Ursula Burns, former CEO of Xerox, and John Thain, former CEO of CIT Group. “I am appointing these seats now in light of a recent board proposal to dramatically restructure the board and significantly alter the company’s voting rights. It is therefore essential that the full board be in place for proper deliberation to occur, especially with such experienced board members as Ursula and John.” Khosrowshahi responded that Kalanick’s actions were “disappointing.” … “Anyone would tell you that this is highly unusual.” The proposal Kalanick was referring to included the following provisions, which were to be made in conjunction with a pending strategic investment from Softbank:

• The Class B shares that Kalanick and other investors held would lose their supervoting rights (10 votes per share) and would instead receive one vote per share.
• Any person previously serving as an officer of the company (such as Kalanick) could only be appointed CEO if approved by two-thirds of the board and shareholders.
• The company would adopt a staggered board.
• Khosrowshahi gained the right to name successors to three existing seats on the board of directors, subject to board and shareholder approval.
• Kalanick would retain his board seat. Of the other two board seats that Kalanick controlled, one would be transferred to Softbank; the second would be filled with the CEO of a Fortune 100 company, subject to Khosrowshahi, board, and shareholder approval.
• The company would commit to an initial public offering (IPO) by 2019. To force an IPO should one not occur, directors representing one-third of the board would be given the right to appoint additional directors until they attained majority control of the board and could initiate the IPO process.

In the end, the proposals were unanimously approved by the board and Kalanick’s nominees Burns and Thain were seated to the board. Softbank announced that it would invest between $1 billion and $1.25 billion in Uber at the company’s current valuation of $68 billion valuation. In addition, it would purchase approximately $9 billion in shares through a tender offer to existing shareholders and employees at a discounted valuation of $48 billion. If fully accepted, the tender would give Softbank an ownership stake of at least 14 percent. The board also agreed to add as many as 6 new directors—three independent, one new chairman, and two designated to Softbank—increasing the board size from 11 to 17. Softbank had the right to terminate the agreement if did not receive sufficient shares through the tender offer at the discounted price.

Why This Matters

1. Uber Technologies had a long history of aggressively entering markets and challenging regulators in order to achieve its operating goals. Did this risk-seeking behavior cause larger problems down the road? Did a willingness to skirt regulations create a precedent that guided future behavior and led to further governance violations? Would Uber have been less successful operationally had it not been as aggressive in new markets?
2. Kalanick set the tone for the company with an emphasis on growth. How important is CEO personality and behavior in influencing the collective behavior of an organization? Can it lead to cultural and widespread organizational problems? If so, is this more true for founder-led companies than companies managed by professional CEOs? How difficult is it to change culture, once it is established? Can the business model of Uber succeed with a distinctly new management and firm culture?
3. The Covington report recommended that Uber implement a series of leadership, board-related, and operational changes to fix its culture. Separately the board agreed to a series of governance changes in conjunction with the investment from Softbank. What impact will these changes have on the culture and operations of the company? Will they improve the governance of Uber? What would prevent the Uber culture from returning to its original culture?
4. Upon joining Uber, Khosrowshahi made the statement that “culture is written bottoms up.” Is this accurate? To what extent is culture created top down, and to what extent bottom up? What implications does this have on governance and leadership? Does Uber need a substantial turnover of management and key non-management employees to successfully complete a cultural shift?

The complete paper is available for download here.