When mismanaged corporate governance can affect the value of a company to the tune of many billions of dollars, it becomes startlingly clear how critical the role that strong and healthy board governance plays in the survival and future of an enterprise. In the case of US shared-office provider WeWork, the valuation of the company reportedly went into freefall in recent months, dropping from US$47 billion in January to US$15b, and then later to US$5.9b by November.
Jamie Dimon, CEO of JPMorgan Chase, which carried out advisory work for the company this year, says he believes WeWork will survive, but that the saga demonstrates the need for companies to have "proper corporate governance" and an independent board before filing to go public.
In the wake of the disaster, Tokyo-based parent company SoftBank is set to outline tougher governance standards and restrictions on dual-class share structures for all the companies it backs.
On paper, WeWork had looked impressive. Until April 2019, WeWork was a "unicorn" with great valuations and excellent public relations. Since its founding in 2010, parent company We Company raised more than US$12.8b and opened locations in more than 100 cities.
Founder Adam Neumann, brandishing a private jet, lavish real estate assets and a declared mission to elevate the world's consciousness, was also poised to become one of the world's richest entrepreneurs. But in a scenario reminiscent of the dot-com bust, he wielded too much company control, burned through a scorching amount of cash, never turned a profit and chased an overly ambitious fundraising agenda. With an IPO and listing on the Nasdaq for WeWork planned this year, and an investor roadshow due to start in October, jittery market investors voiced their concerns and objections, and called it all to a halt.
It was a perfect storm of events that landed WeWork in governance no-man's land – and ended after its IPO was shelved due to lacklustre market response and its co-founder (with his wife, Rebekah) was ousted as CEO. WeWork is now poised to sack 4000 employees and sell off non-core businesses.
Will the company survive? There is "zero risk of the company going bankrupt", WeWork's new executive chair Marcelo Claure told employees after the SoftBank rescue announcement. He has declared that WeWork will get back to basics, make profitability a priority, and review markets.
In the last week of October, Neumann received a final US$1.7b payout to give up his board seat when major WeWork investor and Japanese investment bank Softbank offered him the package as part of a takeover bid and cash injection of US$9.5b, which gives it control of 80 per cent of the company. In a bizarre twist, Neumann will remain as a board observer and can assign two board seats.
In September, WeWork's parent company announced sweeping corporate governance changes in an amended S-1 filing, but despite the overhaul, it was too little, too late – and not enough to satisfy investors.
The SoftBank deal will buy WeWork more time for the short term. The Japanese mega-investor has provided WeWork with US$1.5b, reportedly accelerating a financing agreement that was originally scheduled for April. The Financial Times reported SoftBank CEO Masayoshi Son told colleagues "we created a monster" in WeWork after investing billions into the firm only to later bail it out.
The story is a salutary lesson in how poor governance frameworks can spook investors and sabotage the capital worth of the enterprise. Some commentators have hailed the story as a cautionary tale for startups that exhibit a casual or indifferent approach to traditional corporate governance practices. So in governance terms, what went wrong?
"Will the company survive? There is "zero risk of the company going bankrupt." WeWork executive chair Marcelo Claure
Founder had too much unchecked control
Neumann had almost unfettered power, too much control and multiple conflicts of interest in his dual roles on the board and as CEO. WeWork had a corporate governance structure that granted Neumann outsized control over the company's voting shares. It disclosed financial arrangements that saw outside entities owned by Neumann directly profit from WeWork's operations. In the amended S-1 filing, The We Company said it was changing its high-vote stock from 20 votes per share to 10 votes per share, curtailing Neumann's voting power.
His family was in charge of succession
In the filing, the company also eliminated a key provision that would have allowed Neumann's wife to lead the search for his successor should he ever become permanently disabled or deceased. Instead, WeWork's board will pick any successor.
The filing states that no members of Neumann's family will sit on the board. "Any chief executive officer who succeeds Adam will be selected by our board of directors, acting as a group. We will not rely on a succession committee. Our board has the ability to remove our chief executive officer," the filing said.
The listing process exposed governance flaws
Companies planning to list should prepare for greater scrutiny from shareholders and analysts, according to K Ganesh, founder of venture building platform GrowthStory. Companies of scale should also be built with a view to be sustainable and have great governance around them, the World Economic Forum was told recently. "It [WeWork] is a reminder we need to embrace innovation by keeping those [governance] principles at core," said Shailendra Singh, managing director and head of India and Southeast Asia at Sequoia Capital.
Runaway risks, poor financial governance
Despite huge market valuations, the company never made a profit. A recent loss topped US$1.2b. That was on revenue of just US$1.35b. The company was expected to raise as much as US$4b from the share sale and had lined up a US$6b bank loan, contingent on the IPO.
Newly installed co-CEOs Sebastian Gunningham and Artie Minson have already begun the cost-cutting process, halting new leases and putting that US$60m private jet bought under Neumann's reign up for sale.
A board lacking diversity
WeWork appointed Frances Frei, a Harvard Business School professor and a former head of leadership and strategy at Uber, to its board in September. Frei represents WeWork's first female director. The We Company noted in the filing it expects to name another director to its board "with a commitment to increasing the board's gender and ethnic diversity".