When publicly traded companies are caught behaving badly, markets can hold their feet to the fire. Stock prices take a hit, as Volkswagen witnessed after its emissions scandal. Activist investors mobilize, like when Yahoo shareholders criticized the company's direction. Executives are forced to backtrack and apologize, as with United Airlines after a man was dragged off a plane.
Privately held companies, on the other hand, don't answer to the stock market.
Power tends to be concentrated in the hands of a few. And even those who are in a position to govern — such as board members and early-stage investors — aren't compelled to perform even the most rudimentary intervention. Just look at Uber, where a lack of oversight allowed a culture of bullying and harassment to take root.
Going public used to mean exposing a company to the sunshine that would sanitize its problems. But a growing number of companies — Uber among them — are choosing to stay private longer. The number of initial public offerings in recent years has fallen from a high of 275 in 2014 to 105 in 2016, the lowest number since the global financial crisis, according to Renaissance Capital's U.S. IPO Market Annual Review.
So if companies won't go public, who's responsible for holding them accountable when the supposed adults in the room drop the ball?
The answer, according to corporate governance experts, is you.
"It's essentially public outrage," said Cindy Schipani, a professor of business law at the University of Michigan's Ross School of Business. "If the monitors are behaving badly, there won't be any monitoring. Then we need to rely on employees to speak up, whistle-blowing, and customers putting pressure on companies once these issues come to light."
That was the case when Uber's co-founder and chief executive, Travis Kalanick, resigned from the company last month after its scandals came to a head. The ride-hailing giant was known for sparring with regulators, fighting lawsuits from drivers, and Kalanick's inappropriate gaffes (the founder once referred to the company as "Boober" when describing how Uber's success helped him attract women). As a privately held company that didn't answer to the public market, though, Kalanick and the company's executives received pass after pass, and Uber's board of directors — made up largely of venture capitalists with big stakes in Uber, and Kalanick's personal allies in the firm — took no action.
It wasn't until a former employee, software engineer Susan Fowler, penned a damning blog post detailing systemic sexual harassment at the company, that the wheels of disciplinary action were put in motion. And even then, it was only after that blog post went viral.
"In the private sector, venture capitalists can act quickly when they want to, but they might not unless there's public pressure," Schipani said.
Uber's public pressure came in the form of consumer boycotts, a Twitter campaign urging customers to delete the app from their phones, and a declining public image. In a June survey of Uber customers nationwide conducted by media and technology company Morning Consult, 23% of respondents said Uber's scandals made them use the service less frequently; 19% said they had deleted the app entirely. Of those who had stopped using the service, 28% said they would return if the company fired Kalanick.
Four months after Fowler published her allegations, Kalanick announced he would go on indefinite leave. A week after that, the company's venture capital investors successfully pressured him to resign.
It's not surprising that investors in private companies (who commonly double as board members) can sometimes be slow to act, according to corporate governance experts, because many want to believe the founder whom they invested in can be trusted. But it's also because of a fundamental difference between the responsibilities of private and public boards.
"The board of a private company is there at the behest of the CEO, the owners, and the investors, so your responsibility is to enhance the value of that enterprise," said Eric Flamholtz, a professor emeritus at UCLA's Anderson School of Management. "In a public company, you have a responsibility to help the company, but you also have a responsibility to make sure the company is on the straight and narrow."
Flamholtz, who has also served on the board of a publicly traded company, said the standards of governance at public companies are simply higher: disgruntled shareholders can bring resolutions to the board, board members are up for election after serving out their term, and if a complaint is made they can't just "brush it off."
"I would bet that 99% of the problems at Uber would not have been allowed to happen at a public company," Flamholtz said.
Although there are always exceptions, such as the alleged sexual harassment scandal rocking 21st Century Fox's news channel, being public creates more opportunities for information to get out. There are mandatory regulatory filings, quarterly financial reports, and the need to answer to shareholders at annual meetings. Investors will short stocks at the slightest hint of trouble; activist investors will publicly pressure boards.
This added transparency can put more pressure on companies, which is one of the reasons so many firms choose to stay private. Computer manufacturer Dell famously took itself private in 2013 to dodge Wall Street's harsh spotlight as it shifted its business strategy. Flamholtz said it's not unusual for companies to go private to fix their problems, rather than try to sort out a mess in public.
But the other reason companies — even those in good standing — are choosing to stay private longer is simply because they can. In addition to helping early investors cash out their stock, initial public offerings are a way for companies to raise money from the public market. But private investors flush with cash have been all too willing to continue throwing money at private tech companies such as Uber (the company has to date raised more than $13 billion in equity and debt financing; in comparison, Google had raised only $25.1 million before it went public in 2004). That means there's simply less urgency to go public.
"I'm going to make sure it happens as late as possible," Kalanick told CNBC last year.
There are downsides to staying private longer, though, chief of which is that problems can go unnoticed and unchecked.
The court of public opinion doesn't discriminate between public or private, so investors are increasingly advising entrepreneurs to nip problems in the bud before they become a liability.
"There used to be a perception that, as a private company, you could hide your warts until you go public, but that's not the case anymore," said Paul Wilke, founder of public relations firm Upright Position Communications, who has helped companies go through initial public offerings.
"Twitter and YouTube have fundamentally changed the game for how quickly inside knowledge about bad behavior at a company can move to common knowledge," said James Joaquin, a co-founder of Obvious Ventures, which invests in companies with a focus on corporate social responsibility. "That's been a very powerful tipping point."
In fact, the court of public opinion is now so strong that even if an executive has the legal voting power to prevent his or her ouster, some will acquiesce because of consumer pressure.
"We've seen CEOs step down based not on legal pressure but on consumer pressure, because the business would be in jeopardy unless consumer demands were met," Joaquin said.
Although consumer outcry is more likely when scandal rocks a consumer-facing company such as Uber, United Airlines or Volkswagen, if the last six months is anything to go by, executives and boards have reason to heed the calls of the public.
"Looking at a company like Uber from the outside, there wasn't a legal requirement for [Kalanick] to resign, yet he still did," Joaquin said. "I think you can infer that public outrage really moved the needle there."