Will WeWork Debacle Be the End of Multi-class Shares?

Will WeWork Debacle Be the End of Multi-class Shares?

Did Adam Neumann get the best going away present of all time?

It seems like a fair question following last week’s announcement that the founder of office-sharing startup WeWork was effectively being given a billion dollars to get lost. Not bad for driving a company once valued at $50 billion into the ground. Neumann’s golden parachute prompted The Atlantic to name him “the most talented grifter of our time.”

WeWork backer SoftBank had little choice but to pay a ransom to usher Neumann out the door. Thanks to WeWork’s multi-class equity structure, Neumann’s shares in the stock of The We Co, WeWork’s parent, carried extra voting weight. This was a bone of contention with the investment community during the company’s failed march toward an IPO. In the end, the rich buyout was necessary to wrest control away from Neumann.

Multi-class shares have become a popular topic in corporate governance circles as founders such as Neumann have sought to tap the public equity markets while still maintaining control over their companies. Ostensibly, these companies are offering investors the chance to profit from the founders’ expertise without interference from the peanut gallery. It’s an appealing play for the CEO-as-guru set.

Between the WeWork debacle and other underperforming IPOs this year, critics of multi-class shares have become even more strident in their objections. Earlier this month, Rick Fleming, an investor advocate with the SEC, described the practice as “a recipe for disaster” in remarks at an investor event in Miami. He cited a laundry list of problems that could arise as a result, including self-dealing, insufficient internal controls and hostile working environments.

“In my view, what we now have in our public markets is a festering wound that, if left untreated, could metastasize unchecked and affect the entire system of our public markets,” said Fleming in reference to multi-class shares. While Fleming’s comment may sound hyperbolic, we should also remember ex-Federal Reserve Chairman Ben Bernanke discussing systemic risk during the financial crisis of the late 2000’s.

With the SEC prohibited from banning multi-class shares, Fleming noted that stock exchanges could play a meaningful role in pressuring companies to give up multi-class share structures. One financial industry group, the Council of Institutional Investors (CII), seems to agree. The organization has petitioned the major U.S. stock exchanges to take steps to discourage companies to engage the practice.

Based on the response offered by the NYSE, don’t look for those changes to come any time soon: “Investors should have access to the broadest opportunity set possible and the freedom to make their own investment decisions. Denying companies the ability to access the public markets with flexibility in governance structures will lead to more companies choosing to stay private.”

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