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WeWork: When Founder-Worship Goes Bad

The notion that company founders, especially tech (or allegedly tech) company founders, are special has gained significant traction in recent years. The rise of founder-worship can be traced to Silicon Valley, where a number of iconoclastic, ambitious individuals successfully scaled companies from startup to industry goliath. Steve Jobs, who built Apple Inc. (NASDAQ:AAPL) into a computer and smartphone giant, is perhaps the most iconic of these founder CEOs, but he is hardly alone. Larry Ellison of Oracle Corp. (NYSE:ORCL) is another prime example.


However, while many founders have indeed proven themselves to be remarkably skilled, or even gifted, business leaders, many have faltered. Unfortunately, the pervasive culture of founder-worship that has been perpetuated in the media - and reinforced by internal corporate cultural practices - can also mean that leaders go unquestioned. That can have serious ramifications for a company's success, or even survival.

Adam Neumann, WeWork's erstwhile founder, CEO and board chair, offers a cautionary tale of what happens when a company's leader is treated like a superhuman - and when he starts to believe his own hype.

Delusions of grandeur

Perhaps the most incredible aspect of the rise and fall of WeWork, a co-working company that saw its valuation plummet from $47 billion in January to $7 billion in October, is Neumann's ability to convince so many (supposedly) sophisticated investors to pour billions of dollars into his cash-incinerating enterprise. Of course, nearly all successful founders are good fundraisers (those that aren't will have one on their team), but the sheer amount of capital that flooded into WeWork stands out. Softbank Group Corp. (TSE:9984) alone ponied up $10 billion between 2015 and 2019.

However, Neumann's clear gift for convincing others to believe in his wild ideas proved to be a double-edged sword. Unfortunately, he began to believe his own stories. As WeWork prepared to go public in September, reports began to surface about Neumann's outlandish antics and bizarre pronouncements. As Vanity Fair reported in September, his fantastical claims seemed to take on lives of their own:


"In conversations with people inside and outside the company, Neumann's pronouncements became wilder. Neumann told one investor that he'd convinced Rahm Emanuel to run for president in 2020 on the 'WeWork agenda.' (Emanuel did not respond to a request for comment.) Neumann told another finance executive that JPMorgan Chase CEO Jamie Dimon was his 'personal banker' and that Dimon might leave JPMorgan to run the Neumanns' family investment fund, a person briefed on the conversation said. (A source close to Neumann denied this, and a source close to Dimon told me Dimon has no plans to leave JPMorgan.) Neumann told colleagues that he was saving the women of Saudi Arabia by working with Crown Prince Mohammed bin Salman to offer women coding classes, according to a source. 'Adam's fantasyland became a reality,' a former WeWork executive said."



While big vision is an essential attribute of any successful industry disruptor, it becomes a serious liability when it veers into the realm of apparent delusion - or, at least, fantastical fabulism.

Fiduciary duty is for other people

Many investors like backing founders who have real "skin in the game" as big shareholders in their ventures. Founders often take a more proprietary view of the businesses they lead. That can be a good thing, as it leads to greater long-term focus and alignment of incentives. But, as Neumann has shown, it is not always a good thing.

The danger arises when a founder begins to believe their interests and their company's interests are the same thing. However, no founder, even one who becomes synonymous with the business they built, actually owns their company. When a founder feels he can treat his business like a personal piggy bank, shareholders suffer. The manager's fiduciary duty to shareholders is the same for founders and non-founders alike. Yet, Neumann's evident contempt for the notion of fiduciary duty was on full display during the weeks leading up to WeWork's botched initial public offering attempt, as the Wall Street reported in a post-mortem analysis this week:


"As he was preparing for an IPO that would make him a billionaire many times over, Mr. Neumann was surfing in the Maldives when executives in New York called to go over the all-important document that would be released to investors. Reluctant to cut his trip short, Mr. Neumann summoned a WeWork underling to the Maldives for an in-person briefing, according to people familiar with the episode. Back in New York, Mr. Neumann spent much of the summer working on the document, known as an S-1, in the Hamptons, regularly helicoptering employees out from the city to help. His wife, Rebekah, WeWork's chief brand officer, insisted it be printed on recycled paper, then rejected early printings as low-quality, according to people familiar with the matter. The process was set back by days and the printing shop originally hired for the job refused to work with the company."



Verdict

Corporate governance is a serious issue for all companies, even startups. Founders are too often treated with greater laxity. Indeed, the proliferation - and exploitation - of founder-worship has proven to have serious consequences in some cases. WeWork is merely the biggest and most spectacular example. Investors should take the lesson to heart.

Disclosure: No positions.

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This article first appeared on GuruFocus.