Why You Need to Oust The CEO

Adam Neumann’s Ouster from WeWork Is More than a Business Move: It Is a Cautionary Tale of Poor Governance

Andy Chan
Andy Chan
Sep 29, 2019 · 9 min read
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Photo by Andrew Neel on Unsplash

Over the past month, the media (and many other financial analysts on Wall Street) had a field day with WeWork’s IPO, which ultimately got shelved under heavy pressure from the public market and WeWork’s biggest investor.

While the shared-office-space company has inherent flaws in their business model, their public filing revealed more than just insane losses and looming deadlines for lease payments.

The S-1 filing was pockmarked with questionable governance decisions, leaving many public investors, analysts and observers scratching their heads.

With a board full of renowned, experienced private investors such as Steve Langman and Bruce Dunlevie, many have wondered: why did these investors allow those questionable decisions to go through?

Adam Neumann had big dreams for WeWork, but he has since voted to step down after the IPO debacle. Neumann’s ouster came from huge pressure under Softbank’s CEO, Masayoshi Son.

Neumann has also since ceded majority control, decrease his voting rights from 20:1 to 3:1, against regular shareholders’ rights (previously, his voting rights were amended to 10:1 weeks before the IPO was shelved).

Helming the coworking-space ship will be a joint-CEO duo, who are both senior leaders in the real estate startup.

Many who are aware of the spectacular downfall of Neumann will know that media often described Neumann with very striking adjectives — frenetic, eclectic, outspoken and strange, just to name a few.

Neumann’s strong personality was instrumental in WeWork’s growth. It left media impressions, drummed up investor interest and ultimately, brought WeWork from a single location in SoHo to 839 locations across 111 cities around the world.

Although a brilliant entrepreneur in his own right, Neumann often made questionable decisions which caused a major hoo-ha in the media.

It was clear that Neumann had more than just WeWork’s interests. As outsiders, we may never know the real intentions behind Neumann’s decisions at WeWork — to Wall Street analysts and public investors however, it was simply a case of extremely poor governance.

Neumann Had A Totalitarian Control

Often, co-founders and founders alike are unwilling to cede control of their company, choosing to stay on their thrones throughout their tenure.

While there are successful cases of brilliant — although subjective — CEOs who remained on their seats for a long time (e.g. Jeff Bezos, Elon Musk, Scott Farquhar, Mike Cannon-Brookes), Neumann could not join this list despite running the 4th most valuable startup in the world.

Neumann was famous for his iron grip over WeWork, which was revealed to be a result of a dual-class stock structure.

Such stock structures are not new: Ford and Berkshire Hathaway both have such stock structures and they have since become popularised amongst tech companies.

The dual-class stock structure is popular in tech companies. Typically, the company issues a class of shares to public shareholders. These shares have a significantly smaller number of votes compared to the class of shares available to founders and executives.

Although dual-class structures are often controversial, it is often meant to keep power within a smaller group of people who believe that they can make the best business decisions, while also guaranteeing that they have larger dividend payouts.

In the case of WeWork, ousting Neumann would have been virtually impossible if they went public.

Even when the S-1 filing was amended to reduce Neumann’s number of voting rights, Neumann still had the power to purge the entire board.

Even when the S-1 filing was amended to reduce Neumann’s number of voting rights, Neumann still had the power to purge the entire board.

With Neumann’s power guaranteed in the company, it creates a lot of questions about corporate governance: if the founder behaves irresponsibly, could the board and the public step in to vote against his decisions?

Before going public, Neumann’s totalitarian controlled to a wide array of decisions that were clear conflicts of interests, which builds on to the previous question: Neumann is already irresponsible and erratic, with complete control, only Neumann will be governing Neumann, and that makes no sense.

Establishing the Neumann Dynasty

Family businesses, like its name, often employ family members to run the business.

Children often become successors, and non-family members are usually kept at bay. While there are rare cases of external people coming in to run the business, power in the family business is often kept tight within a small pool of people.

WeWork is not a family business, but looking at the organisational structure would make you think that it is one.

WeWork is not a family business, but looking at the organizational structure would make you think that it is one.

Adam Neumann kept his close friends and family near him, installing them in senior leadership roles, notably:

  • His wife, Rebekah Paltrow Neumann, was the co-founder and chief brand and impact officer of the company. She had a penchant for firing employees on the spot simply because she didn’t “like their energy”. She was also in charge of finding a successor to Neumann if his husband died, but that was since removed. Her power was stripped and she has since stepped down from the board and her original role.
  • Rebekah’s brother and Neumann’s brother-in-law, Christopher Hill, sat as a Chief Product Officer of the WeWork group, while also simultaneously serving as the CEO of WeWork Japan. He has since left the company after his sister’s departure.
  • Neumann’s close friend, Michael Gross, who serves as the vice-chairman of WeWork, is also expected to be part of the ‘oval office’ cleanup.

In total, 20 people comprising of family members and friends are being ousted out of the company under the current leadership.

For a private real estate startup, the family business image is certainly unwanted, especially since it opens many holes in governance.

WeWork Became A Financial Vehicle for Neumann

Neumann was famous for his luxury digs and real estate purchases, but his financial decisions with WeWork are more questionable than lavish:

  • WeWork needed to rebrand for their IPO to go under the stock ticker $WE. That means they need to own the trademark to the word ‘WE’, in case any company swoops it up. Problem is, a private company named ‘We Holdings LLC’ owned the trademarks to the word and WeWork purchased the trademarks for $5.9m. Neumann owned We Holdings LLC.
  • WeWork leases office space from buildings renovates them, then sub-leases them out to individual and organization tenants. WeWork needed to pay landlords due to their lease obligations — one of the myriad landlords included Adam Neumann himself, who earned a large portion of rent from WeWork’s payments.
  • WeWork was also a financier for Neumann: over the past years, WeWork loaned millions to Neumann personally and We Holdings LLC as well.
  • For most, flying in business class, first-class or suites is often a luxury: for Neumann, he needed the much-coveted Gulfstream G650 jet, which he often used for personal trips. His family also hopped in on the rides too. Reportedly, Neumann smoked weed on the plane too.

Neumann’s tenure was riddled with conflicts of interest — combined with his totalitarian control in the company, the board could only sit and watch as he approves his own decision to give himself more money.

It was clear, Neumann was a huge risk factor.

For a company as large as WeWork, having such a CEO is only going to bring the company down as they continuously bleed money, raise money and face looming financial problems.

Though his cult of personality was instrumental in bringing the company to its former valuation of $47bn, WeWork never ensured stringent corporate governance.

Like Uber’s CEO, Neumann’s power was not kept in control by the board. While there is a group of people who will not be fazed and wavered by copious amounts of power, Neumann ultimately succumbed.

Corporate governance is significant in every company. Without it, senior leaders are free to do whatever they want. Arguably, the company is theirs, and most of the time, the senior leaders founded them — it is their ‘baby’.

However, for companies who are growing in revenue and size with private and public investors, good governance is significant as a preventive measure. Though it may seem restrictive to founders, good corporate governance often has more advantages.

Corporate governance is often defined as a combination of systems, mechanisms, and processes that ensure a firm’s direction and control.

In most cases, it balances the interests of many stakeholders, such as public shareholders, private investors, founders, employees, suppliers, and financiers. Sometimes, the stakeholders can also include the public at large and the government.

According to Investopedia, most companies strive to have good corporate governance. Companies who do not possess good corporate governance are often marred by media backlash when scandals occur.

For tech companies like Uber and WeWork, poor corporate governance allowed the founders to do anything they want, seeking hedonism and being bon vivant without care for ramifications.

What would happen if WeWork had good corporate governance?

Neumann’s Power would be Shared

Although Neumann is, by all accounts, an ambitious and brilliant entrepreneur, it was clear that he made many questionable leadership choices over the past few years.

If the board had the power to exert control over Neumann, they could have prevented many of the previous financial mismanagement cases, which would not tarnish the quality of their IPO.

Having advisors and other external parties who can recognize blind spots and provide second opinions is what leaders need. They can:

  • Give different perspectives, stemming from their education and their experience. This allows the founders to understand every situation from every angle, which therefore allows them to make more informed choices.
  • Put a stop on any action that might have the potential to be disastrous. For instance, Neumann could have been given miles to fly business class/first-class around the world instead of owning a $60m private jet, which drained WeWork’s already drying finances.
  • Introduce plans and strategies that the founder might not have previously considered. Everyone has their blind spot and we often need others to point it out.

WeWork Might Not Look like a Family Business

Multi-class stock structures are common amongst tech companies and the market has already embraced that with many startup IPOs. However, it was the image of being a family business that made public investors shy away from the IPO.

If there was strong corporate governance in place, the company might have had set rules around hiring family members and people with close personal connections.

Neumann Might Have Been Controlled Better

Most of the famous startup founders are usually eclectic, outspoken and charismatic. How else can they convince experienced private investors to pump millions and billions of dollars into their companies?

Having a great personality is a boon to the company, but without a set of rules to determine what can be done and what can’t be (for instance, Neumann disclosed about the IPO during the ‘quiet period’, in interviews with Business Insider and Axios. If the court ruled them as violations, stock price can waver).

In this situation, Neumann did not consider the position of the company relative to the government — namely, the SEC. Having ground rules in place that can be extended to cover every situation would have controlled the frenetic co-founder a lot better.

For most founders, having stringent corporate governance can also seem restrictive. What if the founder could have potentially made a great business move, but the board thought it was too risky and decide to put a stop to it?

The idea of corporate governance is contentious like many ideas in business management but generally, having a set of rules and processes to keep the company and their executives in check is always a boon.

For instance, Parker Conrad, the CEO of Zenefits, controlled the startup loosely. The startup is pockmarked with scandals, such as cheating on insurance brokerage licensing tests, booze-filled parties and dismal customer service (it often meant that companies went without health insurance for their employees on a stretch, unbeknownst to them).

Regardless of how brilliant an entrepreneur is, it is always important to deploy self-awareness and stay open-minded. That way, they can have the company’s best interests at heart.

Every company must have good corporate governance — that way, if an Adam Neumann exists in the company, at least they still have the power to do something before everything becomes a catastrophe.

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The Human Business

We’re all about the humans in the business.

Andy Chan

Written by

Andy Chan

I write about human-centric management on Human+Business, Product Designer @ Anywhr, Co-Founder @ Hubblic, CS @ Goldsmiths, UOL

The Human Business

A leadership publication that focuses on human-first management philosophies.

Andy Chan

Written by

Andy Chan

I write about human-centric management on Human+Business, Product Designer @ Anywhr, Co-Founder @ Hubblic, CS @ Goldsmiths, UOL

The Human Business

A leadership publication that focuses on human-first management philosophies.

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