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Here’s How Congress Can Stop the Next WeWork

One is enough, thanks. Photo: Scott Olson/Getty Images

Everybody is mad at WeWork founder Adam Neumann, and why shouldn’t We be? He convinced workers and investors that WeWork was worth tens of billions of dollars, and it wasn’t, and so they lost money and jobs, and as his punishment he’s being paid $1.7 billion dollars to go away.

Arkansas Republican senator Tom Cotton says this is why some people hate capitalism. Cotton says Neumann is a “fraud” and should be investigated and sued. I don’t think an investigation is a bad idea — certainly, I find it interesting that a company that filed an S-1 IPO prospectus just weeks ago saying this …

We believe our existing cash and cash equivalents, together with cash provided by operating activities and unfunded contractual commitments that we expect will be funded, will be sufficient to meet our operating working capital and capital expenditure requirements over the next twelve months.

… and this …

Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer.

… has since gotten into a position where it needed to fire thousands of employees in order to stay solvent, but could not afford to fire thousands of employees because it did not have the cash it needed to pay their severance; and has changed its mind and decided not only that its future success does not depend in large part on the continued service of Adam Neumann, but that its future success depends in large part on being rid of Adam Neumann.

All that said, there’s something Tom Cotton could do about this situation that’s more direct than just calling for an investigation. He could advance legislation to prohibit the style of corporate structure that allowed Neumann to screw not just his employees, but also his co-owners. Instead of giving founders like Neumann outsize power, firms would be required to treat all owners equally: one share, one vote.

After all, since we’re all now in agreement that Adam Neumann sucks, why couldn’t SoftBank and the other outside investors just get together and agree to fire him? He did not own a majority of the equity in the company. And yet, he had control, and he couldn’t be made to go away without his consent.

This problem relates to a risk that was clearly disclosed in the S-1:

Adam’s voting control will limit the ability of other stockholders to influence corporate activities and, as a result, we may take actions that stockholders other than Adam do not view as beneficial. Adam’s voting control may also inhibit transactions involving a change of control of The We Company, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares.

Neumann had special shares that gave him majority control of the company without majority ownership, and that meant he could force the company to do things that weren’t in the interest of the other owners. This is called a dual-class stock structure, and the other owners knew their shares were second class when they bought in. So while they get mad at him, they should also get mad at themselves. (As a side note, it’s probably not a good sign when an S-1 is on a first-name basis with the CEO.)

This kind of structure is becoming more common: In 2017, one in five companies that went public had a dual-class share structure. That structure wasn’t in the interest of the private investors in WeWork. Is there any reason to think it was in the public interest?

I guess one theory could be that innovation depends on a small number of emotionally fragile control-freak geniuses, and if they can’t maintain control while raising ample equity capital, they won’t build their big innovative businesses. Another theory could be that markets are inherently inefficient because even private-market investors don’t have enough faith in the long-term value-generating plans of genius founders, and so while sometimes you’ll get an Adam Neumann who lights everybody’s money on fire, mostly the dual-share structures are saving investors from themselves, by letting the control-freak geniuses make highly profitable investments the dumb investors would have insisted on stopping if they could have.

I do not buy either of those theories, and instead I think what has happened is the global economy has systematically slowed down, and investors are desperate for hot business ideas, and that has caused them to place excessive faith in purported geniuses like Neumann and to agree to investment terms that are woefully lopsided.

This is a problem the government could fix. If Senator Cotton wants to do something about WeWork, why not propose a law that bans dual-class shares? This would be an idea that should be able to garner bipartisan support, as an unusually clean way to stick it to the Big Tech giants and their out-of-touch executives. Democrats can call it a bolstering of corporate governance and Republicans can call it an assertion of the rights of shareholders, and they’ll both be correct.

Here’s How Congress Can Stop the Next WeWork