U.S. Markets close in 1 hr 59 mins

As WeWork Board Mulls CEO Ouster, There Are Echoes of the Fall of Travis Kalanick

Sarah McBride, Gillian Tan and Liana Baker

(Bloomberg) -- In a dramatic battle playing out at troubled unicorn WeWork, members of the company’s board are considering calling for the ouster of Chief Executive Officer Adam Neumann, according to people familiar with the matter. The board is expected to discuss the prospect as soon as this week.

The palace intrigue at one of the world’s largest startups echoes the chaos surrounding Uber Technologies Inc., when the board orchestrated the removal of co-founder Travis Kalanick two years ago. At Uber, after a scandal-plagued year, board member Bill Gurley of Benchmark helped force Kalanick’s resignation, with participation from other investors. Today, the story unfolding at WeWork includes some of the same cast members: Bechmark is a major WeWork investor.

Factions are now forming around the decision of whether to try to remove Neumann, 40, whose outsized personality has been a driving force behind WeWork’s parent company, We Co. It’s also possible that Neumann could benefit financially from stepping down, if some board members’ calculation is correct that the company would be worth more without him. Uber’s Kalanick made a fortune from his departure, with a net worth today of $4.2 billion, according to the Bloomberg Billionaires Index.

SoftBank Group Corp.’s Masayoshi Son, founder of the Japanese conglomerate, is among those pushing for Neumann to resign, as the startup seeks to salvage its initial public offering, a person familiar with the matter said. WeWork’s rocky IPO preparations came at a particularly sensitive time for SoftBank, WeWork’s largest investor, as it works to raise a second $108 billion Vision Fund.

SoftBank expects Benchmark to be aligned with its position on Neumann, one person said. SoftBank has two representatives on WeWork’s board and Benchmark has one.

Representatives for WeWork, SoftBank and Benchmark declined to comment.

“It’s Uber-scale mess,” said Kellie McElhaney, a professor at the University of California Berkeley’s Haas School of Business, who blames both the board and Neumann for not learning from that company’s earlier mistakes. “He’s really taken a first-mover advantage that WeWork had in the space and blown it in a big way.”

The overthrow of Kalanick at Uber could offer lessons for the situation at WeWork. Benchmark sought to drive Kalanick out with help from the courts and other major investors. The VC firm sued Kalanick, accusing him of defrauding investors, and threatened to publicly air claims of mismanagement. Kalanick agreed to resign in 2017 after a confrontation with two Benchmark partners at a hotel in Chicago. Benchmark’s lawsuit was dropped the next year.

In both cases, investors’ machinations have been complicated by the founders’ power within their companies. Kalanick wielded control over Uber by holding stock with strong voting rights, similar to Neumann’s. At Uber, the board effectively stripped Kalanick of that power by changing the structure of the shares, so that when the company went public, all its shares were worth one vote each. Neumann, too, has disproportionate power over WeWork that is being whittled down. When the company first filed to go public, it did so with an unusual three-class share system that gave Neumann the vast majority of the voting power. Following backlash over governance issues from investors, it reduced the power of the high-vote stock to 10 votes per share, from 20.

Though there are similarities between the controversies surrounding Kalanick and Neumann, the two men’s methods are different. Kalanick came under fire for allegations of fostering a toxic workplace culture, including reports of sexual harassment by employees at the company. In contrast to Kalanick’s hard-charging tactics, Neumann often speaks about “elevating the world’s consciousness,” and promoting a sense of community. But Neumann has drawn investors’ ire for perceived self-dealing, including acting as a landlord to WeWork and profiting from a trademark on the company’s name. (Those arrangements have been wound down.) Both CEOs have also faced blowback over the raucousness of company parties and the free-flowing availability of alcohol.

WeWork’s boardroom infighting not only imperils the IPO but also a $6 billion loan contingent on the deal. The unprofitable company must complete a successful stock offering before the end of the year to keep access to the credit facility.

WeWork conceded last week that its plans for going public would have to wait after talks with potential investors lowered expectations for the company’s planned IPO valuation to $15 billion or less, after a previous valuation of $47 billion. Among the concerns they voiced: Neumann’s controversial style and control of the company.

Week of Uncertainty

The news of Neumann’s potential ouster comes after a whirlwind week of uncertainty for WeWork. Some directors are expected to raise the prospect of Neumann becoming non-executive chairman, the people said. Banks that provided a $500 million credit line to Neumann are looking to revise the terms as the company’s struggle to go public casts doubt on the value of his collateral, people briefed on the discussions said last week. It’s not clear what changes they may seek, or what right they may have to make demands.

On Friday, Wendy Silverstein, a big name in New York commercial real estate who joined WeWork last year as head of its property investment arm, left the company. She’s spending time caring for her elderly parents.

Even the president of the Federal Reserve Bank of Boston was adding to the angst. In a speech Friday in New York, Eric Rosengren warned that the proliferation of co-working spaces might pose new risks to financial stability.

“I’ve never seen a company of this size and scale generate such a consensus of negative opinion in my long, long life of following IPOs,” said Len Sherman, a Columbia Business School adjunct professor whose 30-year business career included time as a senior partner at consulting firm Accenture Plc. “There is no box that they haven’t ticked when you think of all the reasons that you might be very concerned -- like blaring red lights. Like, oh my gosh, caution, danger, danger.”

(Adds additional background starting in first paragraph.)

--With assistance from Scott Deveau and Michelle F. Davis.

To contact the reporters on this story: Sarah McBride in San Francisco at smcbride24@bloomberg.net;Gillian Tan in New York at gtan129@bloomberg.net;Liana Baker in New York at lbaker75@bloomberg.net

To contact the editors responsible for this story: Aaron Kirchfeld at akirchfeld@bloomberg.net, Matthew Monks, Molly Schuetz

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.