Cambridge Capital’s Gordon: After WeWork Debacle, Tech Firms to Take Governance Seriously
Cambridge Capital CEO Benjamin Gordon
The doomed IPO of WeWork parent We Co. is likely to pressure technology companies to embrace more robust corporate governance and discourage features such as tiered voting shares that fueled investor ire. That’s according to Benjamin Gordon, CEO of Cambridge Capital, who spoke to CorpGov on a wide range of topics from the struggles of Uber Technologies, Inc. and Lyft, Inc. to the brash approach to controls at Facebook, Inc. to Alphabet Inc.’s emphasis on social responsibility. He also explains the qualities found in the best corporate directors, pointing out that diversity goes beyond race and sex and should also encompass breadth of skills and experience. The full interview is below.
Mr. Gordon has founded four firms, advised over 50 companies, and invested in some of the most successful firms in transportation, logistics, and supply chain technology. At Cambridge Capital, a West Palm Beach-based private equity firm, Benjamin invested in transportation, logistics, and supply chain technology companies. The Cambridge team includes CEOs and leaders who have built companies like GENCO, FedEx Supply Chain, Kuehne & Nagel LeadLogistics, UPS, and others. At BGSA, Mr. Gordon provided M&A advisory services to top companies in transportation, logistics, and technology.He worked with firms like UPS, DHL, Kuehne & Nagel, Agility Logistics, NFI Logistics, GENCO, Nations Express, Raytrans, Echo Global, Dixie, Wilpak, and others. As a recognized expert in the supply chain and technology sector, Mr. Gordon is trusted for his insights. He has been published in Fortune, CNBC, SupplyChainBrain, Data Driven Investor, Supply Chain 247, Freightwaves, and Supply Chain Management Review. He has been interviewed or featured by the New York Times, The Wall Street Journal, Forbes, BusinessWeek, ABC, Lehrer News Hour, Journal of Commerce, Transport Topics, Supply Chain Management Quarterly, and Traffic World. He is also Editor-in-Chief of Supply Chains, a Medium publication. Benjamin earned a Masters in Business Administration from Harvard Business School and a Bachelor of Arts degree from Yale College.
CorpGov: What is the key to good corporate governance at a rising technology company and what steps do you take to achieve it?
Mr. Gordon: Corporate governance is all about proper roles and responsibilities. This is true for technology companies and for all kinds of companies. In technology companies it is particularly important for two reasons.
First, high growth companies tend to focus on growth. That tends to trump all else. As an HBS professor of mine once said, “You can have, growth, margins, and controls. Pick two!” Growth can sometimes undermine governance and controls, because companies may view it as an impediment. A good example is Facebook. Do you think it’s a coincidence that their slogan at one point was “Move fast and break things”?
Second, technology companies often dramatize the importance of the founder and CEO. The myth of the inventor who started his or her business in a garage continues to this day. It is terrific to foster a culture of innovation. But sometimes that creates a situation where a board is reluctant to impose governance controls on that technology founder.
WeWork is a recent example of a company that paid a price because its board did not impose proper governance. Its founder was both CEO and Chairman. And he was allowed to engage in related party transactions, e.g. the sale of his own real estate to the company, the sale of corporate trademarks to the company, and more. These factors played a price in WeWork’s sudden decline.
In my view, the first key to good corporate governance starts with separating the CEO and Chairman position. Sometimes in early-stage companies there are exceptions, but in general it is a best practice to divide the roles. When one person runs the company, he or she often benefits from the checks and balances that come from an independent board. Having an independent chairman helps to achieve that goal.
A second key is to implement checks and balances elsewhere. For instance, when a company’s CEO has a related-party transaction, someone independent should review that transaction. I was on the board of a company whose CEO hired his tax advisor to negotiate a tax issue with the government that affected both the company and him personally. He did so without consulting the board. In my opinion, he should not have done so, and I expressed that feeling.
CorpGov: What qualities do you look for in good board directors?
Mr. Gordon: I look for board directors who have three strengths.
First, they should be inquisitive. Do they ask questions about the business? Do they take the time to understand the company? And when they don’t know, will they speak up? A curious mind is an asset in all areas of life, and not just on a board.
Second, they should have decision-making experience. Did they run similar companies? Do they have experience being forced to make the kinds of choices a CEO must confront? CEO decisions often require considering multiple options, hearing different sides, and making a choice with incomplete information. Business is all about coping with ambiguity, because you never have perfect information. A good board member understands that and can help a company make those decisions.
Third, they should be a good coach. Have they played a similar role coaching other senior executives? Bill Campbell, the Silicon Valley legend known as the Trillion Dollar Coach, advised leaders like Steve Jobs, Larry Page, and Eric Schmidt. He exemplifies this quality.
CorpGov: One trend that has been slow to change among board directors is age. Do you think boards need to get younger and why?
Mr. Gordon: I think boards should offer a diverse set of perspectives and capabilities. That means diversity of experience, diversity of background, and diversity of age. I don’t think boards should necessarily get older or younger. I do think boards should have a mix of both. For instance, I’m currently on one board with a woman in her 40s who is running a technology company, and a man in his 70s who built his own business over the last 30 years. Both of them bring complementary strengths to the business.
CorpGov: In what other ways should boards be diverse?
Mr. Gordon: Much has been written about the lack of diversity in corporate boardrooms. Those articles tend to focus on the fact that most public company boards suffer from the fact that they lack women, African Americans, and minority representation. And that’s true. Diverse companies make better decisions. A recent Forbes article outlines this point. Columbia University professor Katherine W. Phillips has written that diversity “often comes with more cognitive processing and more exchange of information and more perceptions of conflict,” which helps achieve more creative solutions.
But diversity isn’t just about gender and ethnicity. It’s also about diversity of experience and insight. A public company CEO may have different insights from a private company CEO. And a CFO may bring better understanding on an audit committee. Conversely, a technology expert can bring insights that a finance guru wouldn’t envision. And a private equity investor may see patterns that complement the insights of an operational executive. As Deng Xiaoping said in a different context, “Let a hundred flowers bloom!”
These changes are strongly encouraged by government. California passed a law mandating that all California-headquartered public companies must have at least one woman on its board by year-end 2019. But they will come from companies too, because it’s in their interest.
CorpGov: What other things should companies be responsible for beyond shareholder profits?
Mr. Gordon: “Chicago school” economists like Milton Friedman say a company should focus solely on its profit. Meanwhile, leftists like Elizabeth Warren may argue the opposite. Yet in reality, good companies consider both shareholders and stakeholders as a part of good business.
A company’s first responsibility is to its shareholders. But that isn’t its only responsibility. Companies have an obligation to their stakeholders, which include employees, communities, customers, and partners.
Henry Ford was not exactly known for being a soft-hearted liberal. But when he announced in 1914 that he would be doubling his workers’ wages to $5 a day, the world was shocked. He didn’t do it because of pure philanthropy. He did it to reduce employee turnover, and to encourage them to buy Ford cars!
Similarly, companies that invest in their communities can fund schools, support the arts, and sponsor important local initiatives. Google has an entire portion of his company dedicated to sustainability. Hopefully they believe in the cause. But in addition, this initiative helps Google with recruiting, retention, and PR.
In sum, good business is good for business.
CorpGov: It’s common for tech companies to have controlling shareholders. Does the failure of some recent unicorn IPOs such as WeWork and Lyft change the game?
Mr. Gordon: Yes, it does. WeWork’s structure exemplified the problems of a company lacking proper corporate governance. The founder, Adam Neumann, not only held joint titles of CEO and Chairman, but also controlled the company in many other ways. Supermajority voting is another example of a control right that some founders have, enabling them to exert control beyond their pro-rata ownership.
This structure has been more common in media businesses, but became more popular in technology after Google went public. Facebook took a similar route.
These structures can come from a good place. Long-term-oriented founders may believe they can make better decisions than short-term-oriented public investors. But the bargain of public companies and corporate governance requires checks and balances.
Going forward, I think you will see fewer companies with supermajority rights, tiers of classes of stock, and other control structures.
In closing, let me be clear. I love founders. The whole raison d’etre of Cambridge Capital is to partner with founders and entrepreneurs. Great founders bring energy, passion, and drive that help achieve what would otherwise be insurmountable hurdles. We are founders ourselves. I’ve started four companies. At Cambridge, I’ve tried to build a firm that gives founders the kinds of resources that would have helped me in my first company. That includes access to customers, a network of industry leaders, help with recruiting, support with acquisitions and investment, and sounding boards. I think these trends are all about giving founders the tools to help their companies maximize their potential.
For more information about Benjamin Gordon, follow him on Twitter and LinkedIn, visit his companies at Cambridge Capital and BGSA, read his personal blog and logistics blog, watch his videos, and check out his new supply chain publication.