WeWork Debacle: Why Corporate Governance Matters
The recent saga of WeWork—a stylish co-working concept—provides a stark reminder of the importance of adhering to proven corporate governance principals. The corporate form as a means of funding an enterprise works very well when the owners elect a board, the board hires and oversees management, and management adheres to metric-based goals. However, when a cult of personality grows around a founder who believes he or she always knows best, paired with hands-off investors and a passive board, the governance structure fails.
Adam Neumann created an entity not held to proper corporate governance principals by the investors, including the mighty and deeply experienced SoftBank. SoftBank did not condition its $10B investments into WeWork on the establishment of a governance structure that would have imposed limits on Mr. Neumann. To the contrary, Mr. Neumann was allowed to maintain unilateral control over the company without any meaningful board oversight (in spite of powerhouse board members, such as Jamie Dimon of JP Morgan), until it was far too late. Basic oversight was not implemented until after the company had, on paper, lost over 75% of its value (from a reported $47B value to less than $10B) and, in the process, blowing up its IPO prospects.
The discerning eyes of the IPO process quickly recognized that WeWork was run by Mr. Neumann as a fiefdom, with virtually no accountability. When the layers were peeled back (just a little) it became clear that Mr. Neumann had engaged in reckless spending (a $60M Gulfstream jet), insider dealings (Mr. Neumann owned many of the buildings WeWork rented), nepotism (his wife was also a senior executive), grandiose claims (“I will be the first trillionaire”), and virtually no governance protections.While it is certainly true that a dynamic company founder is a hallmark of most early-stage growth companies (this entrepreneurial energy is the backbone of our capitalist economy’s ability to create value), controlling the “animal spirits” unleashed by a successful budding business concept through proper corporate governance should be viewed as a necessity with benefits for both the charismatic founder and any willing investor. Adhering to a tried and true corporate governance structure, with its checks and balances and fiduciary duties, prevents the WeWork debacle and helps ensure that small companies grow into bigger companies, creating value for owners and employees along the way.
The following are a few practical considerations for all companies, but particularly smaller companies that desire to create a solid foundation for growth. These concepts should be included in the bylaws or operating agreement, and should actually be followed in practice:
Mandatory Governance Concepts
- Use a Board Structure. Create a board structure early in a company’s history, with an eye toward diversity and one or more outside directors. This provides the founder(s) with additional unbiased perspectives. Avoid micro-managing – let management run the company and implement strategy on a day-to-day basis. Meet regularly and receive complete information about company performance.
- Set Management Goals. The board should oversee management in a formalistic way with employment contracts, annual reviews, and target metrics in line with strategic objectives.
- Up-to-date Organization Chart. Make sure there is a clear organizational chart and follow it. This sets clear lines of authority.
- Strategic Planning. At least once a year, the board and top management should hold a retreat to create (or review) the strategic plan and update if needed. The strategic plan should dictate management bonus incentives for the upcoming year.
- Create a Culture of Ethical Integrity. Winning in the long-run depends on honesty and integrity and corporate culture starts at the top.
Advanced Governance Concepts
- Committee Structure. Effective boards of sizable entities use committees to accomplish importance tasks and inform the board (compensation committee, governance committee, finance committee, and ad hoc committees are the norm).
- Advisory Board. Use an advisory board, which does not have any decisional power, to learn about the industry and trends (small ownership incentives can ensure top quality advisors, and the results are huge ROI wins).