Deliveroo’s IPO – an ethical dilemma?

Deliveroo IPO: An Ethical Dilemma

Our Chief Reporter looks back at Deliveroo’s IPO and the significance of mounting ethical concerns amongst investors

Phoebe Sennett

4 minute read

Deliveroo IPO

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Deliveroo’s highly anticipated listing on 31 March resulted in its shares falling 30 percent by market close, with the company losing almost £2 billion in value. This spectacular flop has raised further concerns surrounding the City’s future in attracting IPOs from emerging tech businesses.

Business model

Deliveroo’s business model centres upon a three-sided marketplace; their customers, relationship partners and drivers. Firmly positioned in the gig-economy, their drivers are classed as ‘independent contractors,’ meaning they are not entitled to basic workers or employee rights such as minimum wage, sick and holiday pay.

“We have a responsibility to recognise when employment models pose risks to workers and fail to respect human rights. These risks are particularly striking in the gig economy and can have serious consequences for companies” - Vaidehee Sachdev, Impact Analyst at Aviva Investors

Legal risks

The recent Supreme Court judgement, where it was held that Uber must classify 70,000 of its drivers as workers, raised further concerns over Deliveroo’s corporate governance structure. In the judgement, it was successfully argued that those Uber drivers were in a ‘position of subordination,’ because of Uber’s methodology and terms and conditions. Being classified as ‘workers’ would now entitle them to rights such as the minimum wage and holiday pay. Although the ramifications of this decision across the wider gig economy are not clear, it did raise the question amongst investors as to whether Deliveroo should have a greater moral and societal responsibility to provide their workers with rights and benefits.

Deliveroo stated this very risk in its prospectus, citing that: “the independent contractor status of riders, which applies in most of the jurisdictions in which we operate, has been and continues to be, the subject of challenge in certain markets, including in our key markets.”

Deliveroo maintains that people should not read across this judgement to a great extent, however, claiming they do not exert sufficient control over their drivers for the decision to apply – affording greater flexibility to both Deliveroo and its drivers.

'ESG' (Environmental, Social and Governance) investment portfolios

Investors cited the lack of sustainability posed by Deliveroo’s business model with regards, not only the regulatory risks it posed, but also with regards social responsibility.  The rise in the importance of the ‘S’ in ESG amongst investors was further highlighted, when asset manager giants such as Aviva, Aberdeen Standard Investments and M&G refused to participate in the IPO.

“[w]e will not be taking part in the Deliveroo IPO as we are concerned about the sustainability of the business model, including but not limited to its employment practices, and also the broader governance of the business.” - Andrew Millington, head of UK equities at Aberdeen Standard Investments

Following 2020, and the impact of the pandemic, key global players pledged to place a greater focus on ESG considerations – not merely as these investments typically prove to be more resilient and reap greater reputational and financial benefits.

Other risks

Deliveroo is yet to make a profit and, despite ideal conditions for its business model over the last year, it realised an annual loss of £223.7m. Further, as the UK economy increasingly opens, Deliveroo’s customers may well switch their spending power to eating out at restaurants and bars. UK institutional investors were also unimpressed with the dual share structure, providing significantly enhanced voting rights for the CEO and founder Will Shu.