Key Learnings: VC-Backed Companies’ Ethical Scandals

July 23, 2017

VC-Backed Companies’ Ethical Scandals

Who Cares, Why They’re Happening, What to Do About It?

Key Learnings

  1. Recent scandals involving Startup CEOs have generated lots of attention in the media, and among the leading commentators on the Startup ecosystem. The heightened scrutiny may be due to the jarring disconnect between the “good guys” self-image of startups and the egregious conduct of some.  It could also be due to the fact that egregious behavior is more common than anyone ever suspected.
  2. Startups are structurally prone to HR disasters. They are often led by natural Type A rule-breakers whose personalities permeate company culture.  Without strong HR processes found in more mature companies to temper the rule-breaking ethos, a toxic environment can easily develop.
  3. Boards have tools to protect employees, though they can’t change personal traits, and VCs on Board should use them (willingly or under pressure from their LPs). Lack of alignment of interest among VCs on Boards hampers the ability to make tough management decisions.
  4. Lately, VCs have been exposed as having the same types of problems. A Decency Pledge has been proposed by Reed Hoffman, a blacklist of bad VCs may be in the works at YC, and the VC trade association has called for ideas for a code a conduct.

Discussion Recap

The NetForum held it July meeting on July 20th at Sheppard Mullin, courtesy of John Hempill, Esq.  As usual, we had a diverse group of men and women, CEOs and CxOs, VC, PE and Angel investors, and advisors who participated in a lively 90-minute conversation.  The following is my synopsis of the discussion.  Names are withheld to honor the off-the-record rule governing our discussions.

The Agenda:

  1. Why are scandals in the Startup Ecosystem getting so much attention now — employee abuse of all sorts in the corporate world is not new.
  2. Is there something unique about the nature of VC-backed startups that would make them more susceptible to “bad behavior”?
  3. Are there ways to address the problem?

The Discussion

  1. Why Now?

The NetForum participants did not respond to the question as I would have expected.  The reaction was more like “what did you expect, this was bound to explode one day.”  As if a crisis in Startup Governance and/or Culture was to be expected…

I suggested to the group my own view: the Startup Community believes that Business Disruption and Innovation, the mantra of the startup world, will also engender a better world and good citizenship.  So, the realization that the “good guys” (startups) behave a lot like the “bad guys” (Big Corporations) is just too jarring.

It may simply be that the problem is more acute than anyone imagined.  Highly educated, empowered millennials working in startups are just not going to stand for abuse, and in the absence of proper channels to correct workplace issues (internal HR processes or cost-effective legal channels), they will take to the new tools of communication – social media – to pressure companies into action.  It took some courageous people to blow the whistle and the dam broke.  Some of our participants in fact stated that in Corporate America workplace abuse has significantly improved over the last 20 years.  So, perhaps the startup “good guys” are worse than the Corporate “bad guys”?

  1. Are Startups More Prone to Bad Behavior?

Yes.  Unquestionably and structurally so.

One thread of discussion focused on the nature of leadership in startups.  Many of the participants made the point that startup leaders are Type A personalities and rule breakers.  (Our participants, men and women, stated that this was not a gender issue, more a personality issue.)  Hence the companies they lead will reflect their personality and will be infused with a lack of focus on the softer side of management.  These natural tendencies are not held in check by internal processes – HR people are not hired soon enough (one of our CEOs said the HR Director was the 11th hire, another said it was probably the 100th…) and nowadays HR Directors are often overwhelmed by the need to hire to scale and meet the expectations of the VC investors — human capital management receives less attention.  Yet, a strong HR action is needed to instill a good culture in companies staffed by a younger workforce lacking “professional behavior skills” usually acquired in a more structured corporate environment.

Another thread of our discussion was a lot more troubling.  One of our participants, a serial CEO and staffing expert, expressed the view that while he still believes that most people are good and want to do the right thing, there is just an easily observable loss of the basic skill of how to properly deal with employees, or people in general.  Employees and contractors are being asked to perform tasks under ridiculous conditions with outlandish expectations and low pay.  It’s just not a way to run a business and develop an engaged productive workforce.  Several of the participants spoke of their attempts to teach Emotional Intelligence to management teams, noting the serious deficit of that skill in startups (but as others pointed out, not just in startups).  Several participants noted that these observations were not really about startups but about the workforce in general: it’s not just that the CEO is a type A rule-breaker but that society itself was showing less respect to the rules governing interpersonal relations.  The crisis of confidence in institutions and government is spilling over into the workplace…  Some observed this could be an American malady as a stronger social contract in countries such as Canada and Sweden seems to have reduced the incidence of workplace abuse.

This is making startups a potentially toxic work environment.  Type A rule-breakers (supposedly all misreading Ayn Rand) at the helm, lack of proper HR processes, a workforce that has not been socialized in prior professional environments, unrealistic work demands, all in a general context of loss of faith in authority figures.

Boom!

  1. What Can Be Done About It?

The societal and personality issues are beyond the scope of this Key Learnings.  But the Boards of startups need to be cognizant of the special risks associated with startup culture and instill proper processes to provide employees with the best environment to thrive professionally as well as personally.

Many startups have Diversity policies and have committed to inclusiveness in the workplace.  But do these policies have teeth and are they applied to the highest levels of the company?  Our participants noted that VC-backed startup Boards do not treat “culture” as a top priority.  When issues boil over and a scandal can break publicly, or when legal action is threatened, then HR becomes a pocketbook issue and is discussed.  But there aren’t usually any HR KPI’s in the monthly management dashboard to the Board except for tracking of new hires, open recs, and option grants and their valuation.  In fairness, it is hard to measure culture.  Yet, our participants seemed quite firm in the view that Boards know when they are dealing with a rogue management team.

Furthermore, when it comes to discussions about the CEOs and senior management whatever process that exists may break down.  Still a willing Board needs to and can develop means to acquire the information it needs.  When it comes to acting on available information, some of our participants noted that VC Boards are composed of multiple VC funds which interests are not aligned, causing dysfunction and bad communication – a less than ideal environment to have sensitive discussion about management changes.  This may explain why a Board will pay hush money instead of firing a top performing CEO that has engaged in repeated ethical lapses – the decision to push the issue to another day is easier to reach as a group than that to fire the goose that laid the golden egg.

Accordingly, issues will arise, will be contained for a while, and then will erupt in full force.  At that point, corrective action is taken and, as some of our participants indicated the process works itself out.  Yet, the damage is done both to the company and to the people working in the company — it’s too late.

Post Scriptum: What about the VCs Ethical Lapses?

Though it was not the subject of our discussion, VCs are now also facing scandals relating to alleged sexual harassment of women seeking funding or running portfolio companies.  Reid Hoffman has proposed that VCs adopt a Decency Pledge and Y Combinator is said to assemble a blacklist of bad actors in the VC firms.  Just last week, the National Venture Capital Association in its blog promised to promulgate a code of conduct and called for ideas on how to address the issues facing the VC industry.  Many of the issues covered in this Key Learnings apply to VCs.  While some personnel at some VCs have been around for a while and have even run large companies (ie they have been socialized), to my knowledge there is no industrywide code of conduct, no training program or licensing exam for the industry.  If employees are to trust that Board members sitting on the Board of their company are going to competently manage the company, it behooves VCs to create standards for themselves (before the SEC steps in).  Fund LPs could help by insisting they do it.

Thanks for reading, send me any comments at Laurent@parkviewventures.com.

Laurent

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