How Uber’s Trying to Clean Up Its Act En Route to an IPO
(Bloomberg) -- In 2015, explaining why Uber Technologies Inc. was years away from a public offering, co-founder Travis Kalanick likened the company to an eighth grader too young to go to the high school prom. As if to prove the point, the ride-hailing giant was then besieged by a sex harassment scandal, a lawsuit alleging a brazen theft of self-driving trade secrets and accusations of malfeasance that spawned multiple criminal investigations. Since Dara Khosrowshahi took over from Kalanick as CEO, Uber has labored to clean up its act, making an IPO likely this year.
1. What explains Uber’s troubles?
Much of the blame has been directed at Kalanick, whose view of the law as something to be tested is well-chronicled. He defined Uber’s culture by hiring deputies who were, in many instances, either willing to push legal boundaries or look the other way. (Kalanick has said that investors fabricated claims of his involvement in a series of corporate scandals and used intimidation to force his June 2017 resignation.) A broader view is that, for all its celebrated disruptive technology, Uber operates based on a fundamental illegality: It built a worldwide transport business using unlicensed vehicles. This approach allowed Uber and its drivers to avoid a litany of requirements such as insurance, registration, inspections “and countless other expenses,” Benjamin Edelman wrote in the Harvard Business Review in 2017.
2. Which problems has Uber managed to resolve?
It settled the trade-secrets case brought by Waymo, a unit of Google parent Alphabet Inc., in the middle of a jury trial last year for a fraction of the damages being sought. More recently, in a veritable peace-making bonanza, Uber resolved claims by all 50 states that it concealed a massive data breach; persuaded a British judge to undo a ban on its operations in London; and doled out $10 million to more than 400 of its female and minority engineers to make a lawsuit over pay discrimination and sex harassment go away. It also agreed to pay an as-yet-undisclosed amount to end a class action accusing it of putting thousands of women at risk of sexual assault by Uber drivers.
3. How is Uber steering clear of new troubles?
Khosrowshahi vowed to be the opposite of Kalanick on compliance issues. The new CEO hired a former high-ranking Justice Department official as his chief legal officer and tweeted about directing his staff to stop using encrypted and ephemeral communication methods. Several executives linked to shenanigans left while Kalanick was still in charge, and more departed after his successor took over. Khosrowshahi also spearheaded an apology campaign to quell regulatory disputes in Norway, Britain and Brazil. He’s faced criticism for taking the conciliatory approach too far, with some Kalanick loyalists saying the company didn’t fight hard enough in 2018 to stop New York City from capping the number of for-hire vehicles and approving a minimum hourly wage for Uber drivers.
4. What’s still to be done?
Uber remains locked in long-running litigation with drivers who want better pay and benefits. Whether Uber drivers remain independent contractors or must be treated like employees goes to the heart of the on-demand economy’s reliance on a casual labor force to keep costs down. Last year, Uber lost a critical ruling in the U.K., while a California court decision gave U.S. drivers unprecedented leverage to pursue new perks and benefits in the legislative arena. One big unknown is whether any criminal probes are still going on.
5. What criminal probes?
The company was said to be facing at least five separate investigations by the U.S. Justice Department as of October 2017. All that was known about these probes was their subject matters: misappropriation of intellectual property, violations of price-transparency and overseas bribery laws, and the use of software programs for spying on rival companies and deceiving regulators. Uber has stayed mum about those investigations -- though it may be forced to acknowledge outstanding probes as part of its IPO disclosures. Prosecutors typically refrain from publicly announcing they’ve closed a probe when it results in no charges.
6. What impact did Uber’s scandals have on the company?
Initially, the company lost almost a third of its $69 billion valuation, but it’s since rebounded. While the the precise costs to Uber of containing legal woes is unknown, it’s a safe bet they were dwarfed by the startup’s surging revenue -- suggesting the scandals were a tolerable consequence of forcing a new business model on the world. Any lingering fallout from past wrongdoing seems manageable, though preserving the status of drivers as independent contractors remains existential to Uber’s business.
7. What does all this mean for an eventual IPO?
By the end of 2018, Uber found itself in a race with its smaller ride-hailing rival, Lyft Inc., to file confidential IPO documents with the U.S. Securities and Exchange Commission. Both companies then had to cool their jets as the 35-day partial government shutdown all but closed the SEC, delaying its process for reviewing public offerings. But whatever backlog the agency faces amid a frenzy of tech IPO planning not seen since 2000, Khosrowshahi appears to be on track to keep his word about taking Uber public within 18 to 36 months of joining the company in August 2017.
The Reference Shelf
- Which Silicon Valley unicorns will carry out IPOs in 2019?
- A detailed look at Kalanick’s dark fall.
- A QuickTake explainer of the sharing economy.
- While not as pugnacious as Uber once was, Airbnb started picking more fights.
- Cooley law firm’s 25 considerations for companies preparing for an IPO.
- Why a Harvard business professor said regulators should shut Uber down.
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