Benchmark filed a lawsuit against Travis Kalanick last week.

By Robert Siegel
August 14, 2017
August 14, 2017

The chaos over at Uber is one of the most unprecedented and shocking spectacles to come out of any business context in recent memory. First, the world’s most valuable private company had its celebrated and controversial CEO, Travis Kalanick, removed by the board of directors in June. Kalanick was held accountable for a culture of sexual harassment that resulted in the firing of 20 people, the illegal theft of medical records of a rape victim by an Uber executive, and the embarrassing litigation of purported corporate espionage and theft.

And just last week, venture capital firm Benchmark, one of Uber’s early investors, filed a lawsuit against the ousted leader, which claims he committed fraud last year when he created three additional board seats that he controlled. The lawsuit asserts that Kalanick withheld information about the aforementioned issues, and claims that when Kalanick resigned as CEO, he agreed to turn over the three board seats to independent parties, and then went back on this commitment.

The present situation raises two key questions: 1) Does Kalanick need to be immediately removed from the board of directors, and 2) What will be the long-term consequences to Benchmark of this litigation?

Of these two questions, the first is perhaps the easier to answer. A member of a company’s board has two major responsibilities: the duty of loyalty (acting in the best interest of all shareholders and not just one’s own financial interest) and the duty of care (providing proper oversight to a company’s finances and operations). Regardless of the scandals that happened previously at Uber, the question is if Kalanick violated these principles by actively undermining the board’s process to hire a new CEO, either by sabotaging candidates or manipulating the situation in an attempt to regain his position against the will of the board of directors (whom, one must assume, made their decision consistent with these two duties). If Kalanick is hindering the CEO recruitment process, he is clearly violating the duty of care, and likely the duty of loyalty, as the board already decided that he was unable to lead the firm going forward.

In addition, if he has willfully lied to the board as Benchmark has asserted, and if he went back on his commitment to have the three additional board seats he was granted be changed to independent representatives, he clearly should be removed from the board. He would not have been acting in good faith for all shareholders as determined by the board and as previously agreed to by him—regardless of whether he materially withheld information in 2016.

A second question is if this lawsuit will negatively impact Benchmark in its ability to fund entrepreneurs going forward. Even if Benchmark knew about some of Kalanick’s more “aggressive” behaviors in the past, while the venture partnership still holds a board seat, its representative remains legally obligated to act consistently to the duties of care and loyalty—regardless of whether the firm and representative partner may have previously ignored any of the unsavory cultural aspects of Uber about which it may have known. If the firm currently concluded that the lawsuit was the best way to enforce its responsibilities as a board member, it was right to take this step.

However, it has been stated that this lawsuit may reflect negatively on Benchmark. I suggest there is a bigger trend that will come of this.

The last decade of “founder-friendly” investors has, in some instances, led to lax governance and situations where boards abdicated their responsibilities of providing appropriate oversight in order to gain economic advantage via companies that have, in some situations, broken laws, cut corners, and even lost their moral compass. The situation at Uber today is the result of a culture that was built over the last eight years—not the last 60 days.

The important takeaway is that those behaviors that were tolerated while the board looked aside are what permitted this situation to arise. By not dealing in Uber’s early days with the company’s well-known cultural issues, the chickens are now coming home to roost—but in a public forum and with the whole world watching.

 

If the suggestion is that future entrepreneurs will go to Benchmark’s competitors who will be more founder-friendly than Benchmark, those entrepreneurs will be gravely mistaken. Investors and board members everywhere are realizing that the duties of loyalty and care need to be upheld. Board members cannot let situations like these happen.

And, in the case of Uber, the consequence is that the potential of a record economic return for investors and employees is in extreme jeopardy.

The result of this situation is that entrepreneurial behavior for the foreseeable future is likely to be brought back to more traditional norms of good governance and responsibility—both for entrepreneurs funded by Benchmark, and those funded by every other investor in Silicon Valley.

Robert Siegel is a lecturer in management at Stanford Graduate School of Business.

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