Uber’s ESG Risks—is the new CEO up to the Challenge?

Posted on August 28, 2017

Aiswarya Baskaran
Aiswarya Baskaran
Analyst, Technology, Media & Telecommunications Research
Kasey Vosburg
Kasey Vosburg
Manager, Healthcare & Chemicals Research

Uber, the ride hailing company, recently appointed Dara Khosrowshahi as CEO. His appointment comes in the wake of intensifying criticism of the company. Uber is accused of having a hostile workplace culture, mistreating its drivers and using software tools to evade regulators. What are the root causes of these issues, which Khosrowshahi will need to address if he wants to get the company back on track?

In #DeleteUber: The Changing Face of Consumer Boycotts?, Research Products Team Lead Kasey Vosburg wrote about the mismatch between Uber’s corporate culture and that of its user base. The resulting #DeleteUber campaign enabled its closest competitor, Lyft, to temporarily surpass it in daily iOS downloads. Now, five months later, several additional controversies have emerged that have had real consequences for Uber’s management, including the resignation of co-founder and former CEO Travis Kalanick (along with several other executives). The controversies have also impacted the company’s performance and will likely affect its much-anticipated IPO. For example, by May 2017 Uber’s market share dropped from 90% in 2016 to 77% (with the largest decline occurring in the aftermath of the #DeleteUber campaign). During the same period, its US growth slowed from 55% to 40%. The company also continues to face regulatory investigations in multiple jurisdictions, making it all the more pertinent to identify the underlying ESG issues that are contributing to its woes.

Uber’s Human Capital Risks

Diversity and gender equality remain challenges for most technology companies, but Uber’s track record for managing this issue is particularly poor. In February 2017, the company’s upper management and human resources department failed to act against former engineer Susan Fowler’s manager after she alleged that he had propositioned her for sex. While the company admitted that his actions were tantamount to sexual harassment, they dismissed it as “an innocent mistake” and “first offense”. According to Fowler, she has since spoken to several other victims of sexual harassment at the company, including women who had complained about the same individual. Fowler ascribes this inaction to Uber’s corporate culture of putting growth first, alleging that management was resistant to act against the individual because he was “a high performer”. In another example of putting growth before people, the former President of Business in Asia has been accused of illegally obtaining the medical records of a woman who was allegedly raped by an Uber driver with the intention to discredit the victim.

The media coverage of these controversies has greatly harmed Uber’s reputation as an employer, particularly among women. Several female engineers have declined prospective offers from recruiters working on behalf of Uber. They have made their response public through the social media campaign #DearUberRecruiter. This has led to enormous pressure to change the company’s corporate culture. An independent investigation initiated by the board resulted in the firing of 20 employees and presumably also contributed to the ultimate decision of CEO Travis Kalanick to resign. These drastic actions seem to indicate that Uber has embarked on a genuine journey to improve its workplace culture. Uber’s cultural problems run deep and the reluctance of women to join the company will ultimately hinder its growth.

Uber’s Regulatory Troubles

Uber operates in 632 cities and is disrupting the highly regulated taxi industry. It is, however, increasingly coming under regulatory scrutiny. Some of the more contentious issues that give Uber an advantage over taxi companies include its classification of drivers as independent contractors and the lack of vehicle inspections and detailed driver background checks. Instead of addressing these regulatory concerns directly, Uber is accused of using an internal software tool, called Greyball, to evade regulators attempting to investigate its operations. Greyball uses geographic and credit card information to identify regulators who are then denied their service. The use of this software has since prompted a criminal investigation by the US Department of Justice and is another example of Uber’s aggressive efforts to further its growth at any cost.

Uber’s Competition

Uber’s business model relies on the network effect; So the more users and drivers it has, the greater the benefit to other users and, of course, the company. The barrier to switch from Uber to another app, like Lyft, is however very low. The same network forces that that are responsible for driving Uber’s rapid growth could therefore easily turn against it. This is also what happened briefly during the #DeleteUber campaign. Uber’s main rival, Lyft, was quick to take advantage of the situation by positioning itself as a superior alternative when it donatedUSD 1 million to the American Civil Liberties Union.

Uber is currently valued at USD 60 billion. If the company goes public, as expected, these and similar controversies will expose its stock price to significant volatility. Khosrowshahi will need to pay close attention to these and other ESG concerns as he takes over the reins.

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