Uber’s Problems Should Forever Change the Way Smart Founders Think About Boards
By: Benjamin Joffe
Tags: Hax, Startup, Board Of Directors, Sosv

Note: This is a guest post by Adam J. Epstein, founder of the advisory firm Third Creek Advisors LLC, and specialized in pre-IPO and small-cap companies. Adam speaks tomorrow at our Startup Exit Masterclass in San Francisco. Many founders do not realize the importance of boards, who need to bring strategy, accountability, and diversity of thought to their business. Most exemplary were the issues at companies like Uber or Theranos. Adam dives here into the Uber case.

Spend enough time around startups and you’ll hear a common refrain from founders and CEOs: “Boards are predominantly a form-over-substance waste of time.” But for those who have watched Uber’s challenges get splashed across global media, their takeaway should be… the reverse. A properly composed, dynamically engaged board would likely have helped Travis Kalanick avoid the lion’s share of the value destruction the company brought on itself — and then some. And the same is true for your startup.

The purpose of having a great board at any point in a company’s life cycle isn’t to check academic boxes, placate lawyers, or to appease Sand Hill Road. If you really want to understand how savvy entrepreneurs should think about boards of directors, take a look at the largest asset managers in the country. BlackRock and Vanguard, which manage approximately 11 trillion dollars, speak incessantly about the importance of boards for one reason — and one reason only.

Because the world’s most successful institutional investors know that better governed companies… make more money.

Here are five actionable takeaways from Uber’s well-chronicled problems that will help your startup prosper.

1. Beware of famous, over-committed board members

When I was an institutional investor, we were always skeptical of early-stage companies with famous people on their boards, because few were ultimately successful.

As a practical matter, don’t believe anyone who tells you they have enough time to be on a dozen boards, have a full-time job, and do all of them well — they are either overestimating their abilities or don’t really understand how much time is necessary to be a valuable board member, or both.

People like Arianna Huffington and Bill Gurley are about as smart and experienced as people can be, but they were also insanely busy… before they agreed to be on the board of Uber.

2. Board composition isn’t a buzzword.

Every company has two or three strategic imperatives, a handful of key impediments to achieving those objectives, and several core customers/target markets.

Your board should predominantly contain non-employee directors whose backgrounds correlate directly to these elements. Put differently, board members can’t provide invaluable input on strategy, risks, and markets they don’t comprehensively understand — no matter how smart they are.

Imagine how many unnecessary problems Uber could have avoided if they’d had several independent board members who had direct experience scaling successful international transportation companies?

3. It’s true what they say about corporate culture.

Business consulting guru Peter Drucker once famously said that, “Culture eats strategy for breakfast.”

In other words, ethical, respectful corporate cultures are the only ones that can succeed in the long term — there are no exceptions.

As was self-evident from Susan Fowler’s famous blog post, and the Covington law firm’s subsequent memo, Uber’s culture was not healthy enough to eat anything for breakfast.

Great boards have their fingers on the pulse of corporate culture and ensure that ethical standards are not only set, but they are also maintained — and even exceeded (see Southwest Airlines).

Put a bit differently, the “bro culture” that needlessly destroys so much shareholder value (not to mention lives) in the Valley ecosystem is… 100 percent avoidable with high performing boards.

4. Scale is hard, if you’ve never scaled

During my investing days, I used to regularly ask CEOs the following question: “How can the good news become the bad news for your company?”

What I meant by that question is that inexperienced CEOs often don’t see how too much growth could be a bad thing — it’s counterintuitive.

But businesses don’t scale by accident; they are architected for scale. History will likely — and rightfully — reflect that Travis Kalanick is one of America’s most incredible entrepreneurs, but like many before him he understandably struggled with the transition from fast-growing start-up to large enterprise.

Rigorous, proactive board oversight of scaling issues by those who have “been there, and done that” might seem tedious and restrictive in real time. But you, and your shareholders, will be very happy you had it.

5. Dual class stock — be careful what you wish for

There are lots of reasons why dual class stock structures — like that which existed in Uber — are attractive to entrepreneurs.

Chief among them are the ability to contractually limit the power of characteristically imperious venture capitalists, and stem the influence of those with shorter-term liquidity interests.

But what kind of board members do you think your company is going to attract, if their governance roles are functionally neutered?

Think about the question from the viewpoint of a prospective board member: “Why on earth would I join the board of a company where I am foreclosed from, you know, governing?”

Three reasons likely come to that person’s mind:

the stock might be worth a lot; it might be good for my resume; and/or the networking with other board members could prove valuable.

Do you really want that person on your board?

What about the VCs who join the boards of dual class companies? Well, former Uber board member Bill Gurley recently insinuated at a Goldman Sachs conference that the boards of most VC-backed private technology companies are often the same as… “clapping audiences.”

When you see all the problems Uber’s management ran into with scale, culture, etc., you realize just how costly boards comprised of fawning spectators can be.

Smart entrepreneurs are now on notice that they should embrace… the exact opposite.

Adam J. Epstein advises pre-IPO and small-cap companies through his firm, Third Creek Advisors, LLC. He’s a former institutional investor, author of Amazon best-seller The Perfect Corporate Board (McGraw Hill, 2012), and contributing author to The Handbook of Board Governance (Wiley, 2016).