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Travis Kalanick’s ouster from Uber shows founder control doesn’t mean job security

LiveMint logoLiveMint 22-06-2017 Ellen Huet

San Francisco/Southfield:Silicon Valley’s founders and chief executive officers (CEOs) treasure having tight control of their own companies. They often pad the board of directors with allies or create special super-voting stock classes that ensure they always have final say.

But a leader’s dominance isn’t a guarantee that they’ll keep their job when the company hits hard times. Case in point: Travis Kalanick, Uber Technologies Inc.’s co-founder, resigned on Tuesday as CEO after five major investors in the embattled ride-hailing giant asked him to leave. The San Francisco company, valued at $69 billion, had been dogged since February by allegations of sexism and sexual harassment, trade secret theft, mishandling of a rape victim’s case and other scandals.

Investors felt that it was best for the company’s future that Kalanick leave. While Uber’s business continues to do well, Kalanick’s presence at the company led to turmoil, like a rash of executive departures. An initial public offering, which would let investors cash in on the sizeable growth of their stakes in the company, now seems farther off given Uber’s tumultuous year.

Kalanick could have fought back: he and his two co-founders, Ryan Graves and Garrett Camp, control the majority of shareholder voting rights, according to people familiar with the matter. In stepping aside—albeit under pressure from big investors like Benchmark Capital and Fidelity Investments—Kalanick joins the ranks of other powerful tech leaders who lost their jobs.

For an industry that pioneered tight-grip controls for founders—see the skewed voting structures at Alphabet Inc., Facebook Inc., Zynga Inc. and Snap Inc.—a founder relinquishing power is a big deal. “This is a relatively new phenomenon where you have these tech startups where the founder and co-founder can control tremendous amount of a company and it grows very quickly, but it doesn’t mean that they are the right people to run the company,” said Steve Nilsen, an Atlanta-based recruiter for executive search firm Boyden. “Just because the company grows large doesn’t mean they grow up parallel to the company.”

Uber’s plight is similar to that of Zenefits, a San Francisco-based human resources software start-up. Last year, after the company admitted that some of the software it made allowed its employees to skirt state regulatory requirements, investors started to push for its founding CEO, Parker Conrad, to resign and let the company start a new chapter. Conrad controlled the board, which was just him, two other Zenefits executives, and one outside investor, so he had to be persuaded to agree to the plan rather than be forced. Board members heavily pressured the CEO to step away.

Later Conrad regretted the decision, people with knowledge of the matter told Bloomberg at the time. Even though Zenefits negotiated how they would describe Conrad’s exit, the new CEO, David Sacks, blamed Conrad for Zenefits’s compliance problems in letters to employees. That rankled Conrad, according to the people, and he has started a new company. Zenefits also offered existing investors more shares in the company if they agreed not to sue.

Sometimes a leader can be convinced to step aside for the greater good. “The argument is, do you want this company to survive?” Nilsen said. “This is your baby, do you want the baby to live and grow, then these are the conditions. Even with an outsize ego like Kalanick, in the end, the life of his creation is probably more important than daily control.”

Kalanick echoed that sentiment in a statement. “I love Uber more than anything in the world, and at this difficult moment in my personal life, I have accepted the investors’ request to step aside so that Uber can go back to building rather than be distracted with another fight,” he wrote.

Silicon Valley history is spotted with other famous founders being ousted from the top spot. In 2001, Larry Page gave up the Google CEO role to a more experienced Eric Schmidt at the urging of John Doerr, whose firm Kleiner Perkins Caufield & Byers had invested in the young search company. Jack Dorsey, Twitter’s CEO, was booted from that job in 2008. Sometimes it happened after the companies had gone public: Mark Pincus, who famously owned shares in Zynga that had 70 times the voting rights of some other shares, was replaced as CEO in 2013. Groupon CEO Andrew Mason was ousted the same year.

All of those leaders, except Mason, eventually became CEO again, which both evokes the most famous fired-and-returned CEO—Apple’s Steve Jobs—and brings up the question of whether Kalanick will ever do the same.

“I’m sure the Steve Jobs experience is in the back of many peoples’ minds right now,” said Nilsen. “Maybe he will make a miraculous comeback. But he won’t be able to do that if the company ceases to exist in its current form and there’s nothing to come back to.”

Not every founder of a beleaguered start-up steps aside. Elizabeth Holmes remains CEO of Theranos and has a firm hand on the blood-testing company, which has faced regulatory scrutiny and failed lab inspections. But leadership changes at Uber may set an example for future companies whose culture and business practices are criticized.

“There’s just less tolerance for that kind of behaviour than there was 30 years ago,” said David Larcker, a professor at the Stanford Graduate School of Business. “It’s hard to imagine a company of this size having this type of culture. As it grew, you would think they would be smart enough to know they had to mature.” Bloomberg

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