By Alissa Amico – Managing Director, GOVERN
The list of global unicorns – private companies exceeding a billion-dollar valuation – is dominated by two flags: Chinese and American.
This bipolar nature of the world of corporate giants is not a reflection of the importance of the two largest global economies but a symptom of the effectiveness of the ecosystems that have produced them. Japan, the third largest economy globally, 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.
While historically, the largest companies were in the hydrocarbon, petrochemical, industrial and financial sectors, the evolution of the global economy has challenged this status quo, which reigned unchallenged until only five years ago. In 2013, when the term unicorn was coined, only 89 companies trailblazed the billion-dollar mark. Since then, the growth of unicorns – numbering close to 300 and valued collectively at almost $900trillion dollars – has been utopian and Kafkaesque at once, considering the slowdown of the global economy.
All signs point to the fact that technology unicorns, alongside large state-owned companies, will dominate rankings of the largest global corporations. Ex-unicorns will feature with similar prominence among the largest listed companies, despite a slowdown in their listings and their preference to stay private for longer, as the Airbnb case highlights. Today, it is hard to dispute that the future of large global corporations is underpinned not by their physical assets but by their ability to create technologies to fulfil real and imagined needs.
And yet, while the DNA of our largest corporations has mutated at a bewildering speed, regulators have been left far behind with laws and regulations still more suited to the ‘brick and mortar’ as opposed to a ‘network’ company. Although intangible assets are at the core of most large corporations today, international accounting standards still suggest that assets such as patents and trademarks can be recognised only if their market value can be established though a transaction with a third party.
“Many of the largest technology companies do not have board governance capacities that would appear to be called for in companies of their size and complexity”
Perhaps the most important aspect that has eluded regulators has been the governance of technology companies and technology unicorns in particular, which account for the vast majority of billion-dollar firms. While the regulatory focus since the global financial crisis has been hijacked by the financial sector, the largest companies today are not banks, but technology unicorns. It is no longer Goldman Sachs, Wall Mart or Unilever, but Uber, Airbnb and Google that are global ‘household brands’ with potential to contribute to, or – more worrisome – disturb financial, social and even political stability.
While regulators globally have been busy cooking up rules for ‘too big to fail’ or, in the sector’s jargon, systemically important financial institutions, the most systemically important companies today, both from the point of view of their social influence and their market valuations, are not financial institutions but technology unicorns and ex-unicorns, following their listing. And yet, these companies are not addressed by specific corporate governance rules as are banking or insurance firms.
This regulatory void is not in fact driven by governance excellence at large tech unicorns and ex-unicorns, as recent episodes highlight. Telsa and Facebook are both ex-unicorns and have demonstrated governance failures, the repercussions of which are felt not only by their shareholders, but also by users whose data they have failed to protect and whose physical safety has on occasion been compromised.
Similar challenges are facing smaller technology startups in developed and emerging markets where governments are seeking to foster tech entrepreneurship. Careem, Uber’s equivalent in the Middle East, for example, experienced a cybersecurity breach a few months ago, involving a leak of millions of customer details.
Given the growing role and the enormous influence of tech unicorns and large tech listed giants on citizens globally, regulators need to consider how their governance – or lack thereof – could impact consumers and shareholders. In order to avoid the scandals that have recently surrounded some of these firms, regulators need to consider governance rules to specifically address listed tech companies as these are becoming an important category of public companies.
Most tech companies effectively have various entrenchment mechanisms, such as multiple class shares or supermajority requirements for key corporate decisions, which, effectively, frustrate shareholders’ ability to have a say. The governance arrangements of the largest unicorns and ex-unicorns such as Alphabet, Facebook or Amazon all highlight the governance challenges arising from the dominance of their founder-CEOs who are also, in most cases, majority shareholders.
In particular, recent scandals have highlighted that unicorns and ex-unicorns, post listing, demonstrate systematic governance risks linked to the dominance of their founder-CEOs evident in the unfolding Tesla case. Tesla is far from an isolated case in this regard. Alphabet’s dual-share class structure gives its CEO voting power 10 times that of its other shareholders. In this year’s proxy documents, investors have complained that ‘currently a one per cent minority can frustrate the will of our 66 per cent 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 position of tech companies is that investors are aware of what they are signing for and that founder-CEO incentives are perfectly aligned with the long-term company value, a key preoccupation during the financial crisis.
In their letter to stockholders at the time of Google’s IPO in 2004, Larry Page and Sergey Brin, the company’s co-founders, openly suggested to shareholders 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’.
The limits of this trust were tested earlier this year when Snapchat listed non-voting shares and index providers moved to protect shareholder rights by excluding new companies with non-voting stock (but allowing legacy firms to remain). Snapchat is not the only tech giant that has shares with no voting rights; Alphabet has added them in addition to existing multiple class shares. The movement towards non-voting shareholder capitalism might continue.
Founders of tech companies are correct in that the objective of the regulations should not to be to place ambitious CEOs in a straitjacket. Instead, regulators need to consider the founder-centric reality of most tech firms and the need to nurture the technologies that lie at the core of these firms. What is needed is a better understanding of the compliance and technical risks that these companies present, which are the opposite of dispersed ownership companies and in some ways different from other controlled companies.
Remuneration oversight and approval, for instance, is one such non-issue for tech companies. While large listed companies have rushed to bring in remuneration committees at the board level, the need for these at tech firms are far from clear. The oversight of Larry Page’s one-dollar compensation as Alphabet’s CEO should be the last priority on the governance agenda, and yet the company boasts a board Leadership Development and Compensation Committee.
Instead, issues of priority include the separation of CEO and chair roles, which are often combined in tech companies such as Amazon, Facebook and others. By virtue of their US listing, these companies are allowed to combine the two roles, unlike in two thirds of OECD countries and indeed emerging markets from India to Saudi Arabia, which now recommend and require separation. This naturally erodes the fundamental role of the board as a control mechanism over the executive.
While, to their credit, some US-based unicorns and ex-unicorns are voluntarily doing away with this structure, this should be made a requirement, especially for controlled companies where founders are also shareholders. Introducing a chief operations office role, as was done by Uber after a series of scandals when Travis Kalanick, now ex-CEO, admitted to needing ‘leadership help’, helps to further segregate duties. In fact, had it been done earlier, it might have avoided him being ousted as the company’s CEO.’
As Albert Einstein once suggested, ‘we can’t solve problems by using the same kind of thinking we used when we created them’
Further custom governance structures for founder-controlled tech companies are needed to reconcile the diverging objectives of supporting founders and other shareholders. While some large tech companies have adopted a lead independent director role, director(s) specifically elected by minority shareholders could give tech boards the real independence that they need. Instead of making some corporate decisions subject to supermajority provisions that necessitate founder-CEO approval, minority directors’ approval of specific issues could bring needed checks and balances.
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 and CTO reporting directly to the board. Similar to the way in which the chief risk officer at banking organisations now reports to the board risk committee, the chief technology officer or equivalent should report directly to the board or its technology committee.
Technological competencies of tech boards should be reinforced, similar to the concept of ‘fit and proper’ in the banking sector, where the central banks approve board candidates. The structure of the board and its committees should reflect the priorities of tech giants. A technology committee of the board would support its decision-making much more than, for instance, a remuneration committee in companies where senior executive remuneration is not an issue and board remuneration is not a priority, either.
Regulatory complexity, notably on data security and privacy, which has emerged as a key issue for many firms, needs to be addressed at the board level. Many of the largest technology companies do not have board governance capacities that would appear to be called for in companies of their size and complexity. The dominance of tech boards by venture capital partners from their earlier days may not only undermine their independence but also their growth prospects.
These nuances in the governance of large, listed tech companies need to be addressed by global regulators. Given the expected rise of tech firm listings globally, encouraged by the transformation of the global economy, specific rules to address their governance are called for. These could take the form of additional regulatory requirements, based on the size and sector of the company, as it is already the case in the banking sector or requirements applicable to tech firms which are listed on dedicated exchange segments.
It is time to recognise that efforts to simply abolish high-tech, privately owned 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 to better protect guest security, how to foster Facebook without compromising user privacy, and how to allow Uber to operate without cannibalising the taxi system.
A similar transformation is needed in regulatory approaches to corporate governance of large tech firms that 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’. Indeed, fresh thinking is called for to address the impact of global technology firms that have emerged as an important force not only of industry but also of social and political disruption and, in some cases, destruction.
About the Author:
Alissa Amico is the Managing Director of GOVERN, an Economic and Corporate Governance Center which works alongside public and corporate leaders in advancing research, policies and best governance practices in emerging markets. A unique research and advisory entity, GOVERN provides expertise and technical assistance on economic and corporate governance to policymakers and support to leading private and sovereign entities in emerging markets, deploying internationally recognised practitioners and academics.
Before founding GOVERN, Alissa was responsible for overseeing the OECD’s work on financialmarkets and corporate governance in emerging markets, notably in the Middle East and North Africa. Alissa joined the OECD in 2005 to establish a regional programme on private sector development in the region with the relevant Ministers. As part of this work, she has launched a regional project on financial markets and corporate governance with heads of stock exchanges, securities regulators and central banks and other decision-makers.