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CEO Scrutiny Spikes WeWork IPO

The founders of companies getting ready for IPOs used to get lionized. Now, they’re getting thrown to the lions.

It wasn’t so long ago that the mythology surrounding tech founders was such that Snap was able to go public by selling shares that gave stock owners no voting power at all, leaving control firmly in the hands of CEO Evan Spiegel and other insiders. That was two and a half years ago. Since then, Snap’s stock price has fallen from $27 to $16, and pre-IPO scrutiny of unicorn leadership has increased palpably.

Take WeWork. Last week, the company’s board of directors voted to fire founder and CEO Adam Neumann, whose outlandish behavior (which went well beyond stating that the mission of his workspace company was to “elevate the world’s consciousness”) helped derail the company’s IPO. According to Reuters, an inside source said that in voting Neumann out of the CEO position, their message to him was simple: “This IPO has gotten distracted by you.”

Neumann’s ouster is part of a trend in which IPO-bound unicorns are considering more carefully the market’s perception of their executive leaders. In the run-up to its May IPO, Uber famously sacked CEO Travis Kalanick, who continues to serve on the Uber board. More recently, another company on the verge of cashing out—Juul Labs, which recently spurred a breakdown in merger discussions between Phillip Morris and Altria (which has a 35% stake in Juul)—parted ways with its CEO, with concern about the safety of vaping products growing in the background.

But it was Neumann’s ouster that once again brought to light broader concerns about corporate governance at the new generation of upstart companies.

Watchdogs had a field day as more information about Neumann and The We Co. came to light. It was more than just concerns over atypical CEO behavior like getting stoned on a Gulfstream jet. Neumann was leasing properties he owns back to WeWork. Despite not being a member of the company’s board, Neumann’s wife was given the power to name his successor if he were to die or become disabled.

Even publishing a standard S-1 registration statement with the Securities and Exchange Commission (SEC) turned into a fiasco, according to insider accounts. (Deep-pocketed investors might have overlooked those kinds of peccadillos for an enterprise that wasn’t hemorrhaging money). Just yesterday, We Co. pulled the plug on the  WeWork IPO, formally withdrawing its registration statement.

Importantly, the episode also offered more ammo for critics of multi-class equity structures. As recently as last month, Neumann was slated to own shares of We Co. stock that controlled 20 proxy votes per share. The company slashed that number down to 10 in response to market backlash over giving Neumann that firm of a grip on its management.

With Neumann now serving as We’s non-executive chairman, his super-voting shares have been reduced to three votes a piece. Note that Uber went through a similar winnowing process with ex-CEO Kalanick and his super-voting shares in preparation for its IPO, turning “one share, one vote” into a sign of its commitment to sound corporate governance.

Last month, we predicted that The We Co. IPO “may serve as a bellwether for the market’s overall level of apprehension about multi-class shares and complex structures.” The implosion of the offering feels like a strong “no” vote against them.

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