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Unruly, reckless start-ups must eventually behave

26 July 2017 by Leo Martin

Unruly, reckless start-ups must eventually behave - read more

Leo Martin of GoodCorporation says Uber shows us at some point game-changing start-ups have to play by the rules.

From Silicon Valley start-up to global powerhouse, Uber is widely regarded as a huge entrepreneurial success story, the subject of business school lectures and one of the most highly-valued private companies, priced by some at $70 billion.

Now operating in around 80 countries, it has revolutionised taxi travel through the use of smartphone technology and a sophisticated matching algorithm.

Talks of an initial public offering later this year led to considerable interest. However, the string of ethical culture scandals that have resulted in several senior management resignations, including that of CEO and founder Travis Kalanick, could well have an impact on that time frame, and possibly the value of the company long term.

According to US press reports, Uber insiders are seeking to sell their shares, but San Francisco brokers who arrange private sales of technology company shares say demand for Uber shares has dried up.

Uber has been the subject of controversy from the outset, taking on the taxi industry without itself offering taxi services. Uber is a technology company that provides a phone app linking freelance drivers to customers needing a lift. As such it has somewhat avoided the legislation around the provision of taxi services, such as commercial insurance, background checks or vehicle inspections.

Lasting impact

To borrow Mark Zuckerberg’s description of Facebook, Uber has been ‘moving fast and breaking things’, but the position it finds itself in shows that for start-ups there comes a point when challenging the status quo has to make way for embracing the rules.

There is a limit to how long a company can face inwards before becoming accountable to the wider world of investors, customers, employees and the public at large. The world of social media makes that accountability easy.

“There is a limit to how long a company can face inwards before becoming accountable to the wider world”

Although creating new markets and offering services that meet customer needs at an affordable price are the bedrock of entrepreneurialism, bullying, harassment and discrimination have no place in the modern workplace.

Any high-profile or sustained association with such practices can have a toxic and damaging effect, as Uber is discovering.

Culture matters and not just for employees and the company’s reputation, but for shareholders too. Bad behaviour can have a lasting impact on the bottom line. Volkswagen’s share price still sits at half its peak before the emissions crisis, and Rolls-Royce’s profit for the year was wiped out due to its £670 million fine for corrupt practices.

Mark Carney, Governor of the Bank of England, has argued that ‘the succession of scandals mean that it is simply untenable now to argue that the problem is one of a few bad apples. The issue is with the barrels in which they are stored.’

Tough to evaluate

Companies of every size and level of maturity need to take greater account of organisational culture, devoting resources to evaluating and reporting on it.

The UK Corporate Governance Code states: ‘One of the key roles for the board includes establishing the culture, values and ethics of the company … The directors should lead by example and ensure that good standards of behaviour permeate through all levels of the organisation. This will help prevent misconduct, unethical practices and support the delivery of long-term success.’

Although the advice is clear, as yet there are no standard definitions or established methodologies for companies to follow, making it hard for them to work out how to measure culture.

Many businesses undertake employee surveys, but fail to benchmark them or focus in on the right questions. All too often companies shy away from publishing the results for fear of negative comment and feedback.

Consequently, both outside investors and inside directors are starved of useful information.

Wilful blindness

Judging by the scale of senior departures from Uber, it would seem that many senior executives were aware of the negative culture, yet earlier on chose to do nothing about it.

Success through challenging the rules, as Uber seems to have achieved, can lead to an illusion that no rules apply, even within the company. A wise start-up will recognise that although it is possible to break the mould with a product, ignoring good governance and responsible management practices comes at a heavy price, and not just in terms of bad headlines.

Unhelpful data

Investors are actively looking for effective indicators of sustainability. They increasingly comment that the reams of environmental, social and corporate governance data that fill companies’ sustainability and corporate responsibility reports are unhelpful and at times meaningless when it comes to assessing viability.

Although 51% of FTSE board directors agree boards should take greater responsibility for shaping and measuring culture, this is not focused in their data gathering. Companies young and old continue to focus on financial metrics and sales-based key performance indicators.

“A wise start-up will recognise that although it is possible to break the mould, ignoring good governance comes at a heavy price”

The 2016 Volkswagen annual report is a good example. Although the company’s mission statements focus on serving customer needs, assuming responsibility for the environment, and acting with integrity, the management KPIs are focused solely on return on sales, cash flow, net liquidity and revenue.

Although these are undoubtedly important to the business, there is no success measurement against the company’s own mission statements. There is nothing in the Volkswagen KPIs that looks at culture. These purely financial KPIs leave the company at risk of lurching from one culture-based scandal to the next.

Measuring techniques

GoodCorporation has been measuring corporate culture and behaviour since the start of the millennium. In our experience, this is best done through face-to-face interviews with key stakeholder groups.

When measuring ethical culture we use 25 questions based around 10 ethical culture themes. We find that mixing the face-to-face interviews with a quantitative survey is the best combination. Negative answers can be challenged and explored to understand the underlying issues at stake.

We use the answers to the 25 questions to measure the ‘net ethical culture score’, which is a bit like a politician’s ‘net approval or disapproval rating’. It has the huge advantage of being one number and simple to understand.

We would like companies to publish this type of data, or at least share it with the board. In this way culture, and changes in culture, could be captured and brought into board strategic thinking.

Whatever the approach, it is clear that culture matters, so boards need evidence of how it is being measured and managed. Poor culture cannot be hidden and, as we have seen from the string of Uber headlines, it can topple any senior staff members who preside over it.

Leo Martin is Managing Director of GoodCorporation

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