Author: Julia Molo | UC Berkeley School of Law | J.D. Candidate 2020 | Posted: February 6th, 2019 | Download PDF
Corporate governance has experienced a phenomenal transformation over the past several decades. The story of this shift, and Milton Friedman’s 1970 New York Times article heard around the world (or at least, the boardrooms of corporate America), are well-documented. Friedman’s article laid the intellectual foundation for the “shareholder primacy” revolution of the 1980s. In the decades since, Friedman’s view that the sole social responsibility of the firm is to maximize shareholder profits— leaving social and stakeholder concerns to individual bargaining and the government—has become sacrosanct in law, business, and academia. An impressive newspaper article, to say the least.
In recent years, however, it has become increasingly difficult to reconcile the growing social demands on American corporations with Friedman’s theory of the firm.
Take the gig economy. The free market system that Uber, Airbnb, and Lyft have built their platforms on has created economic opportunities for millions of people who offer products and services on a contractor basis. Tapping into these latent economic inefficiencies has proved immensely valuable. These companies have amassed enormous valuations. Uber is eyeing an initial public offering that would value the company at $120 billion. Airbnb was recently valued at $31 billion; Lyft at $76 billion. The social output of these corporations, in wealth creation terms, is evident. But a discord remains: the wealth created by these companies is tied to a small number of insiders who own stock. These inside investors and employees reap the vast majority of profits, while the gig workers—the ones creating much of the value for these companies—can’t partake, or have a say in, those winnings as independent contractors.
This begs the question: is Friedman’s theory that firms that maximize shareholder value maximize social value for stakeholders as well still relevant in today’s gig economy? Particularly, if that company is private?
Airbnb says no. And the company is going to the SEC with its argument.
Airbnb has asked the SEC to change its rules to allow the online home-sharing platform to grant its hosts stock in the company while it is still private. In a nutshell, Airbnb’s argument is that changes to Rule 701—the relevant SEC rule governing equity awards of private companies—would maintain existing liquidity levels of early-stage private companies while including a new type of worker as shareholders.
In its letter to the SEC, the company said, “Airbnb believes that twenty-first century companies are most successful when the interests of all stakeholders are aligned. For sharing economy companies like Airbnb, this includes our employees and investors, but also the hosts who use our marketplace.” CEO Brian Chensky explained, “Our community model is different than a business with a traditional hierarchical structure and we are excited to have the chance to work with the SEC to consider reforms that could make more economic opportunities available to more people.” Airbnb’s General Counsel Rob Chesnut echoed these sentiments in his comments to the SEC: “As a sharing economy marketplace, Airbnb succeeds when these hosts succeed. We believe that enabling private companies to grant hosts and other sharing economy participants equity in the company from an earlier stage would further align incentives between such companies and their sharing economy participants to the benefit of both.”
Airbnb’s peers have spoken up, too. Shortly after Airbnb, Uber sent its own letter to the SEC petitioning for the change. “Providing equity would allow partners to share in the growth of the company, which could lead to enhanced earning and saving opportunities for the partner and for the generations ahead,” Danielle Burr, Uber’s head of federal affairs, said in the letter. Postmates’s October 2018 letter to the SEC similarly stated, “While we are proud that our fleet earns significantly higher than minimum wage across jurisdictions, we are also committed to the long term upward mobility of our [gig workers].”
But the latest wave isn’t the first among gig economy companies to look into stock-sharing. Ride-hailing startup Juno famously pledged to give its drivers equity when it debuted, but later nixed the plan when the company realized that it would be too difficult. Uber itself met with the SEC multiple times in 2017 to push for equity-sharing with their drivers. While a united front of industry leaders is a strong sign of an initiative gaining steam, it is unclear—and curious—why Uber felt the need to follow in Airbnb’s footsteps and issue a letter to the SEC given their existing discussions. It also raises familiar questions of whether public companies can or should structure themselves around the socially-minded opportunities available to private companies. Etsy, itself a gig economy-structured company, notoriously faced difficulties with reconciling the needs of its sellers and its investors after going public.
Despite the hurdles ahead, Airbnb’s efforts emphasize how the old labor contract between employer and employee has expired, and with it, the stronghold of shareholder primacy. Taking its place is a new order in which people demand meaning from work, and in return give more deeply and profitably to those organizations that provide it. From corporate behavior to employee management, corporations, young and old, are realizing how significant employee satisfaction and inclusion is for their bottom line. It is not sustainable to leave the most valuable members contributing to shareholders’ long-term profits out of the economic equation.