Dinosaur Governance in the Era of Unicorns

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here) by Lucian Bebchuk and Kobi Kastiel.

The list of global unicorns—private companies exceeding a billion-dollar valuation—is dominated by two flags: Chinese and American. This bi-polar nature of the world of corporate giants is not a reflection of the importance of the two largest global economies but the effectiveness of the ecosystems that have produced them. Japan, the third largest economy is home to exactly one unicorn and Germany, the fourth largest economy, is home to less unicorns than India, the fifteenth economy in the world.

In 2013, when the term “unicorn” was coined, only 39 companies have trailblazed the billion-dollar mark. Since then, the growth of unicorns—numbering closer to 300 and valued at almost $900 trillion dollars—has been both utopian and Kafkaesque, considering the slowdown of the global economy. All signs point to the fact that technology unicorns, alongside state-owned companies, will dominate rankings of the largest global corporations.

And yet, whilst the DNA of largest corporations has mutated at a bewildering speed, regulators have been left behind with laws and regulations more suited to the “brick and mortar” as opposed to a “network” company. While following the financial crisis regulators have been busy devising rules for “systemically important” financial institutions, the most systemically important companies today both in terms of their social influence and market valuation are technology firms.

Given the growing role and the enormous influence of tech unicorns on citizens globally, regulators need to consider how their governance—or lack thereof—could impact consumers and shareholders, especially as unicorns have emerged as some of the largest listed companies following their listing. In order to avoid the scandals that have recently surrounded some these firms, regulators need to consider governance rules to specifically address listed tech companies as these are becoming an important category of public companies in their own right.

In particular, recent scandals have highlighted that unicorns and ex-unicorns—post their listing—demonstrate similar and systematic governance risks linked to the dominance of their founder-CEOs evident in the Tesla case. Nor is Tesla an isolated case: Alphabet’s dual-share class structure gives its CEO voting power 10 times of its other shareholders. In this year’s proxy documents, investors have complained that “currently a 1% minority can frustrate the will of our 66% shareholder majority.”

For now, policymakers appear torn between clipping the wings of CEOs and protecting shareholder rights. These need not necessarily be antithetical: the powers of founder-CEOs can be balanced with shareholder and stakeholder rights without diluting their creative genius. And while it is tempting to marshal simplistic solutions such as curtailing founder-CEO rights by doing away with dual class shares, this may do a disservice to both companies and their shareholders.

The perspective of tech companies is that investors are aware of what they are signing up for and that founder-CEO incentives are aligned with long-term company value. In their letter to stockholders at the time of Google’s IPO, Larry Page and Sergey Brin, the company co-founders, suggested that “by investing in Google, you are placing an unusual long-term bet on the team, especially Sergey and me, and on our innovative approach.”

Founders of tech companies are correct in claiming that the regulators’ objective should not to be to place ambitious company founders in a straight jacket. Instead, regulators need to consider the founder-centric DNA of most tech firms and develop a better understanding of compliance, technical and privacy risks that these companies present, which are all significant. Perhaps most importantly, the separation of CEO and Chair roles, combined in Amazon, Facebook and other firms needs to be urgently addressed.

Most tech companies are allowed to maintain Chair-CEO duality by virtue of their US listing where it is permitted, unlike in two-thirds of OECD countries and now many emerging markets. To their credit, some American unicorns are voluntarily abandoning this structure following their listing, and this should be made a requirement especially for companies where founders are also controlling shareholders. Introducing a COO role, as was done by Uber in the midst of a scandal when Travis Kalanick, now ex-CEO, admitted to needing “leadership help”, can help further segregate duties.

More generally, the Grand Canyon of information gap between executives and boards of large technology companies needs to be narrowed to facilitate oversight of all-powerful CEOs. This can be enabled by executives such as the COO, CFO, CTO reporting directly to the board. Similarly to banks, where the Chief Risk Officer now reports to the board Risk Committee, the Chief Technology Officer or equivalent should report directly to the board or its Technology Committee.

For this to happen, the structure of technology company boards and their committees should better reflect the priorities of these corporate giants. A Technology Committee of the board would support their decision making much more than a Remuneration Committee which most unicorns introduce after their listing and which is largely irrelevant given their compensation structure. For instance, the fact Facebook has Audit and Remuneration committees yet and no committee focused on technology is perplexing.

Independence of large tech company boards can and should be reinforced by introducing directors specifically elected by minority shareholders. Instead of making some corporate decisions subject to supermajority approval that necessitate founder-CEO agreement, minority directors’ approval of specific issues would bring needed checks and balances in corporate decision-making in these companies which are heavily CEO-centric in their decision making.

Many of the largest tech companies do not have board governance capacities called for companies of their size and complexity. Regulatory complexity, notably pertaining to data security and privacy, needs to be addressed at the highest levels of the organisation. This requires reinforcing technical competencies of boards based on the concept of “fit and proper” in banking, where Central Banks subject board members to specific requirements and approve their appointment.

It is time to recognize that efforts to simply abolish high tech companies such as Airbnb (in France), Facebook (in China) and Uber (in the United States) are doomed to fail: a U-turn to a hotel, a phone book or a taxi is simply impossible. Instead, regulators are now considering how to enable Airbnb better protect guest security, how to foster Facebook without compromising user privacy, and how to allow Uber without cannibalizing the taxi system.

A similar transformation is needed in regulatory approaches to corporate governance of large tech firms which have emerged among the largest listed companies globally. Applying conventional corporate governance regulations to tech giants has so far yielded similar results as applying dinosaur race rules to the Formula One.

Just like love in the times of cholera, governance in the age of tech firms needs to consider the specific risks that listed tech giants pose in order to protect user and investor rights. As Albert Einstein once suggested, “we can’t solve problems by using the same kind of thinking we used when we created them.” Fresh thinking is called for to address the impact of global technology firms which have emerged as an important force not only of industry but also of social and political disruption and, in some cases, destruction.

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