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Corporate Culture Problems At Snap Inc.: What Should Its Board Do About It?

London, UK – July 30, 2018: The buttons of Snapchat, Facebook, WhatsApp, Twitter and other apps on the screen of an iPhone.Getty

The recent departure of two Snap executives is just the tip of the corporate culture iceberg. Snap has been plagued by corporate governance issues such as inappropriate relationships, short-lived C-level executives, imperious leadership, FBI/DOJ/SEC investigations, and class action lawsuits.

The most recent news came as two senior executives left after an investigation into an inappropriate relationship with an outside contractor. Head of Global Security, Francis Racioppi, was fired late last year after the company completed an investigation into his relationship with an outside contractor he had hired. When the relationship ended, Racioppi cancelled the contract. Racioppi’s departure was followed by Head of HR Jason Halbert. Halbert had recruited and hired Racioppi, who also reported to him.

Racioppi and Halbert aren’t the only ones fleeing the ghost. CFO Tim Stone (formerly with Amazon for 20 years) left after just 8 months. Stone was apparently unhappy with the drop in stock price and consequently his pay package. He also circumvented CEO Evan Spiegel and went directly to the board to ask for a pay raise after learning that another exec was getting a larger compensation package. CFO Stone’s departure led to a sharp drop in stock price, which is $7 as of press time, compared to its $17 IPO price.

The Human Resources issues are one topic that the board needs to address as a part of a complete corporate culture overhaul. Do they have an updated code of conduct in place? Is there annual training that includes unconscious bias awareness, updated anti-sexual harassment and compliance training, and very comprehensive reporting training for management? Do they have a working hotline system for anonymous reporting?

CEO Evan Spiegel has managed to maintain an unusual level of control as founder/CEO. In the Snap IPO, public shareholders did not acquire voting stock. After the IPO, Spiegel controlled 48.4% of the voting stock. Spiegel’s post-IPO bonus was worth $637 million and represented 3 percent of the total shares outstanding at the time of the IPO. It will be paid out over three years, adding to his control of the stock over time. Spiegel’s co-founder, Bobby Murphy, is the second-largest shareholder, with 47.4 percent voting power. The two essentially control all shares, and if one of them dies or becomes incapacitated, the other takes over all voting rights for those shares. So in theory this is a public company, but it does not have a public company stock structure.

Then there is the mass exodus. Of those who helped take the company public, nearly all senior execs are gone and more than a dozen senior execs have departed in the past year. Mr. Spiegel is very aloof, working on the top floor of the headquarters in his “Ivory Tower” alone with his two assistants, traveling separately in his own jet on the IPO roadshow and traveling with an inordinate amount of armed security, even to his own offices.

Former employees have reported that Snap management stifles dissent, once you voice an opinion that doesn’t agree with Spiegel, you begin to lose status and are bullied out.   The board does have a separate Chairman as a counter-balance to Spiegel’s otherwise unchecked power. Chairman Michael Lynton, former CEO of Sony Entertainment is a well-qualified chairman with significant leadership and board experience. The remainder of the board has excellent experience and deep and broad skills directly relevant for Snap as well as corporate governance and operational backgrounds.

While leaderships styles vary, Spiegel’s domineering style isn’t working for the social media giant. The platform redesign that Spiegel pushed through in early 2018 has been a catastrophe. After traveling to China and meeting with social media companies there, he decided to completely revamp flagship app SnapChat. With an impossible 6 week timeline that was eventually missed, Spiegel took control of the redesign right down to the minutiae of font choices. Amid so much concern from the engineering and design teams, Snap called a “council” for employees to be able to express their concerns. Even after the “council,” several glitches, negative and mixed user reviews, and design team concerns, CEO Spiegel pushed the redesign through with disastrous results. SnapChat lost users on a quarterly basis for the first time in its history and the stock price dropped to $4.99/share. Mr. Spiegel had been touted to Wall Street as a design guru with a gut instinct for the user experience. The design debacle and his insistence on an investment into Spectacles (video-recording sunglasses) that led to a $40M write off proved otherwise and brought his leadership into question. The board may be allowing Mr. Spiegel too much leeway or they aren’t measuring key metrics closely enough in guiding the company’s strategy. Or possibly, they weren’t being made aware of what was happening. It wouldn’t be the first time that the board was uninformed of major strategic happenings at Snap. It’s reported that in mid-2016, Mark Zuckerberg approached Spiegel about Facebook’s interest in buying Snap. Mr. Spiegel didn’t disclose the overture to the board of Snap, he alone made the decision to pocket veto any further discussions with Facebook.

Snap is also the subject of multiple regulatory inquires from the SEC, FBI, and the DOJ. Questions have been raised about how Snap collects and reports user statistics. Further investigations relate to their IPO disclosures about Instagram competition. Snap former head of growth Anthony Pompliano is also in arbitration with Snap alleging that he was wrongfully terminated when he raised concerns that the IPO misled investors with false metrics. Concerns such as Pompliano’s should have a clear process in place for reaching the audit committee, independent of the CEO and inside executives. A standard “hotline” whistle blower policy should be in place in every company. The policy should state how an employee can make a report, to whom exactly the report shall be made and that the employee will be protected from unlawful retaliation and discrimination for their having properly disclosed or reported illegal or unethical conduct. This would allow the board to independently determined if an investigation was needed and further action taken.

It does appear that changes are coming, Mr. Spiegel has publicly acknowledged the design change mistakes. “We rushed our redesign, solving one problem but creating many others” he wrote in a memo to employees last fall and for the past seven months, he has held monthly employee town-hall meetings in the Santa Monica office. While these are good signs, it’s likely the board may need to consider a plan to start working on their CEO succession plan. It’s not often that a founder CEO can scale to profitability and unless Mr. Spiegel can adjust his management style, Snap’s success may require a change in leadership. Unfortunately, the power doesn’t lie with the board, it’s squarely in the hands of Spiegel and Murphy who hold all the voting rights.

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