The age of tech superheroes must end
WHETHER it’s Theranos chief executive Elizabeth Holmes or ousted Uber CEO Travis Kalanick, or the heads of currently troubled public companies like Evan Spiegel of Snap and Elon Musk of Tesla, powerful founder-CEOs who were once lauded for flouting convention are facing a new reality: They aren’t superheroes, after all. Treating them as if they were has been bad for their companies and investors alike. It’s understandable how we got here – the genius tech founder mythology has its roots in the pantheon of real-world demigods widely credited with revolutionizing industry, from Thomas Edison and Gordon Moore to Steve Jobs and Jeff Bezos. Investors and experts in corporate governance say the problem is that building corporations and stock-market valuations on the notion that every tech CEO is potentially building another Apple is ridiculous and counterproductive. “If your only argument is Steve Jobs or Jeff Bezos, you don’t have an argument – you have a couple of exceptions,” says Paul Kedrosky, a partner at early-stage investment firm SK Ventures. The worship of founder-CEOs is at its apex right now for two related reasons. First, there’s the explosion in capital channeled into venture-backed startups. All that money chasing only so many hot startups means founders have more leverage than ever, and they are finding ways to control their companies no matter what, effectively making themselves dictator for life. “You could argue there’s never been a moment in history where a private-company founder has more power,” says Adam Epstein, an adviser on corporate governance to CEOs and their boards. Even when these companies go public, some of their founders remain omnipotent. For instance, Mark Zuckerberg controls Facebook Inc. because his shares allow him more votes on all corporate matters than everyone else’s combined. The same is true of Alphabet Inc co-founders Larry Page and Sergey Brin. Even companies without such monster revenue, such as Snap Inc and Blue Apron Holdings Inc, grant their founders nearly absolute power. Despite the risk to shareholders, who are relatively powerless if management falters or markets turn, it seems everybody wants a piece of the superhero myth. The market is currently witnessing a run-up in the value of publicly traded tech companies the likes of which hasn’t been seen since the dot-com bubble of the late 1990s.
Many athletes believe in a “Sports Illustrated cover jinx” – a superstition that those who appear on it are destined to experience bad luck. CEOs may be subject to their own jinx. According to a 2008 study posted to the National Bureau of Economic Research, the firms of CEOs recognised for their supposed genius see a subsequent drop in performance, possibly because their leaders become distracted by efforts to burnish their images with books, speaking gigs, Twitter jags and the like.
Treating CEOs as if they were born on the planet Krypton also leads to, among other things, their being paid too much money and granted too much power.
This isn’t just about giving CEOs more credit than they are due – it also has direct consequences for how they wield influence in their own companies. In a typical firm, whether public or private, the CEO serves at the pleasure of the board of directors, which is elected by the firm’s investors. In theory, shareholders are granted power according to how much of the company they own, and they can hire and fire the CEO at will. In practice, boards can be packed with friends of the CEO, especially when that person is also an equity-holding founder.
Power is solidified when the founders persuade investors to grant them superhuman privileges of corporate rule:
> At Tesla Inc, a provision in the company’s by-laws means any change to the board must be approved by a supermajority of shareholders. This effectively gives Musk, with 22% of shares, control of the company.
> At Uber Technologies Inc, Kalanick negotiated in 2016 to add three board seats that he controlled, which led to a lawsuit by one of Uber’s biggest investors. Uber has since moved to a one-share, one-vote governance structure, according to a spokesman, and the board has grown to 17 seats from 11.
> At Theranos Inc, Holmes held shares that granted her 100 votes to every one held by other investors, giving her unchecked power.
> At Stripe Inc, investors offered its co-founders supervoting shares – which typically come with 10 votes per share – as an incentive to take the company public.
> At WeWork Cos, co-founder and CEO Adam Neumann has 65% voting control and sits on his own compensation committee.
> At Snap, publicly traded shares grant no votes at all, so as not to impinge on the prerogative of Spiegel.
> In the past year, Spotify Inc and Blue Apron also went public with ways of guaranteeing shareholders couldn’t check the power of their chief executives.
Among these companies and their precursors, there are examples of smart founders who were able to use their power to help their companies grow sustainably. But they tend to be the exceptions that prove the rule.
“Once a trend starts, then all founders want it, but I can count on three fingers the founders that should be in complete control of their companies with no governance or oversight,” says Sarah Cone, founder of venture capital firm Social Impact Capital.
Silicon Valley
Fortunately, the trend isn’t really catching on outside of Silicon Valley. In 2017, just 14% of companies went public with permanently unequal voting structures, according to data from the Council of Institutional Investors.
There are legitimate reasons – from the founder’s, if not necessarily the investor’s, perspective – why founders would want more control. Many serial entrepreneurs have had the experience of being pushed out of a previous company or forced to sell earlier than they would have liked. And for decades leading up to the previous tech-stock bubble, says Kedrosky, VCs had much more power than founders and were not afraid to use it. Even first-time founders have heard these stories, he adds.
There are signs that uncritical veneration of tech founders is on the way out. There’s Kalanick’s ouster, the Theranos collapse, Facebook’s scandals and Snap’s poor performance.
At Tesla’s annual shareholders meeting on Tuesday, Musk faced a vote to remove him as chairman of his own board and to replace three of his appointees to that board. While both measures failed, shareholders are suing Musk.
When investors once again see chief executives as mere mortals, who knows what might happen. Perhaps the good governance that has kept the largest firms chugging along decade after decade – even as they keep pace with some of these upstarts – could become trendy again.