Boldness, skyrocketing growth, and claiming to be a tech company—for a time, WeWork had many of the signs of a typical Silicon Valley company. Except it’s based out of New York. It’s actually more of a real estate company. And it had serious corporate governance issues, which came to light when its S-1 filing revealed its $47 billion valuation was wildly unrealistic. In a little over a month’s time, WeWork’s valuation took a major nosedive, CEO Adam Neumann was ousted by the board, and the company is now in crisis mode with no IPO in sight.
Now the coworking space company (rebranded as The We Company) has new co-CEOs and the board faces a reckoning as the startup says it will “pursue more strategic growth,” consider making thousands of job cuts, try to not run out of cash, and slow down its expansion plans.
While these developments have been remarkable to watch, they also present opportunities for other startups to look inward, and boards of directors to give careful thought to their approach to corporate governance and their views of risk. When companies experience incredibly fast growth, it’s easy to lose sight of the big picture and to fully grasp the level and variety of risks that they are up against. These are some of the areas that other startups’ boards, including audit committees, should focus on as they review their companies’ growth strategies:
- Notice imbalance of voting power: Could the board have done a better job of enforcing better voting rights for investors? Neumann’s multi-class voting structure was a red flag. At one point, his stock gave him 20 votes per share, but that is now down to three votes per share.
- Inquire about lack of diversity: Diversity on executive teams and across boards lead to valuable perspectives and fresh opinions—something that WeWork’s all-male board was missing. A more equitable balance on boards can make a big difference in questioning critical issues and noting risks that may not be apparent to directors who are all thinking the same way. Differences are a good thing when people are charged with protecting the interests of investors and advising a company on what’s best for the business.
- Questionable transactions: One of the more surprising tidbits to come out of the WeWork IPO filing was Neumann’s charge to his own company to use the word “we” in the rebranded We Company name. Through a private company he managed, Neumann had possessed the trademark rights to the word. WeWork disclosed this July transaction in its S-1 but by late September disclosed it had retrieved the funds.
- Look at the goals: Is the race for topline growth and market share at all costs wise? Asking this question can reveal current priorities and the risks associated with them. For directors and Audit Committee Chairs, tough questions should be par for the course. Pushback is part of the job.
- Know the limits of the company: Led by a charismatic chief executive who had some wonderful ideas, WeWork eventually ran into an identity crisis. Similar companies to WeWork had run into big problems when a downturn came, and it wasn’t clear how WeWork’s business model could withstand a recession or the threat of another competitor that operates perhaps without the same level of brashness.
Corporate Governance Lessons Learned
Where does this leave WeWork? The company has pledged to operate like a public company, although there are no details on when it might go public. Meanwhile, it’s burning through cash, landlords are wary of making any more deals, and it’s become a credit risk to bondholders. And the company has a heavy load of lease obligations on its books (the changes in lease accounting rules had worked in WeWork’s favor in terms of attracting enterprises to use its office space and offload their own operating leases).
These issues are not easy to overcome when a company is growing like gangbusters and many metrics are pointing upward. Until a crisis hits, it can be tempting to think there is “no problem to fix.” But there were major corporate governance issues here all along—and the fixing began much too late, after the company took a huge hit to its reputation. For fast-moving companies looking for takeaways from this crisis, their boards of directors need to be assertive. That includes:
- Scrutinizing unreasonable valuations
- Inquiring about questionable numbers (the now pulled S-1 included “contribution margin excluding non-cash GAAP straight-line lease cost”)
- Paying attention to risky endeavors, whether expansion is happening at lightning speed or conflicts of interest are inherent in deals or high-level employee arrangements (questions about Neumann’s wife’s role at the company has since been criticized, and she is no longer there)
For WeWork, revamping corporate governance certainly became a priority at the last minute, with changes to Neumann’s voting rights (he’s still nonexecutive chairman of the company). For other startups on the IPO path, a careful look at their governance practices will be necessary as investors have higher expectations of a company that gets to that level. With all the attention WeWork is getting, in the immediate future, count on investors being more in tune with what makes for smart governance.
RoseRyan Director Christopher Ludwig heads our Corporate Governance practice, which includes our Sarbanes-Oxley Compliance and Internal Audit solutions designed for fast-moving companies. He has held compliance-focused and finance roles at KPMG, CafePress.com, The Federal Reserve Bank of San Francisco, and IBM.
