Ethical Issues in Snap’s IPO

This article was originally published in MarketWatch on February 21, 2017.

Ann Skeet is the Director of Leadership Ethics at the Markkula Center for Applied Ethics at Santa Clara University.  Views expressed here are her own.

Investors have been eagerly anticipating the public offering of Snapchat’s parent, Snap Inc., which is expected in early March, but there are at least three compelling reasons to sit this one out.  

The first reason not to invest is the most obvious:  you can’t.  Unless you know one of Snap’s founders, or are “friend or family,” or an institutional investor, it’s extremely difficult to cash in on Snap’s IPO.  The company is making one of the six biggest set-asides ever for a U.S. listing, and uniquely cuts out both employees and customers, the Wall Street Journal reports.

Reason two: Snap is structured in such a way that new shareholders won’t have voting rights and the input on matters usually associated with such rights, including board composition and executive pay.  According to the Council of Institutional Investors, companies with a controlling shareholder tend to underperform those that don’t. Such firms are also more likely to do transactions with interested parties, creating greater potential for conflicts of interest to arise.

Companies go public to raise capital. They do so by adding owners and spreading the risk. Rights typically convey with those risks. Investors should be wary of a company that wants to share the risk, but not the returns or owner’s rights, with shareholders.

Reason three: Evan Spiegel, the CEO, has a questionable personal history. “Deleting should be the default,” Spiegel has been quoted as saying. No wonder. Details of sordid e-mails he sent in 2009 and 2010 when he was an undergraduate student at Stanford University were released to the media in May 2014. Spiegel, now 26, was in college just a few years ago. The e-mails detailed illegal drug use, underage drinking, misogynistic behavior, including urinating on a woman after she passed out following sex, and harassing women he regarded as being overweight.

Spiegel apologized immediately after the release of the e-mails saying, “I’m obviously mortified and embarrassed that my idiotic emails during my fraternity days were made public. I have no excuse. I’m sorry I wrote them at the time and I was a jerk to have written them. They in no way reflect who I am today or my views towards women.” This is the person who will have considerable and unusual control over Snap after its IPO, unchecked by traditional governance measures.

A study by KRW International found that CEOs whose employees gave them high marks for character had an average return on assets of 9.35% over a two-year period, almost five times as much as those with low character, according to an April 2015 Harvard Business Review article about leadership character and effectiveness.  

Another researcher identified four moral principles: integrity; responsibility; forgiveness, and compassion, and measured CEOs on these attributes.  “Virtuoso” CEOs received high ratings on all four principles and were identified with standing up for what’s right, expressing concern for the common good, letting go of mistakes, and showing empathy.  At the other end of the spectrum were CEOs of low moral character, lower-performing executives identified as “self-focused” CEOs. Their concerns were personal gain and caring mostly about themselves and their own financial security.  

My characterization of this type of leader is that they do not represent the right interests while serving in a formal leadership role. In other words, they fail to play their position. In the case of Snap, self-interest seems paramount.

This list of reasons suggests the potential for a lack of ethical leadership by both Snap’s management and its board of directors. While ethics can get short shrift in business, market movements toward impact investing, ethical consumption choices by millennials, and emphasis on ESG (environment, sustainability and governance) measures in the financial world suggest Snap is a bad investment.  The paradigms of utilitarianism, rights, justice and virtues — different lens to consider ethics — all find Snap and its leaders falling short.

Additional Reading

A Business Ethics Case Study on Executive Integrity 
Three examples of CEOs whose leadership of their firm has been called into question over matters of their personal integrity and behavior.  Issues have included their personal political positions and contributions, personal behavior and relationships with employees while CEO, and illegal and inappropriate behavior in college.