Beyond the entire conversation about whether this is legal or illegal, and whether this is typical or atypical, there is a much more significant issue.
The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him.
As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction.
As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.”
This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.
I really don't know what you're talking about. I'm a WeWork customer - we rent an office at a WeWork for our small company.
We're not at WeWork because of hype, or the image of the CEO, or anything like that. We're at a WeWork because it's a cheap/easy way to get an office, that we can scale when the company grows with minimal issues since it's month to month. We shopped around a few competitors, WeWork happened to be the best combination of price vs. space vs. availability, so we went with that.
I haven't exactly done a poll, but I doubt that most WeWork customers know or care about WeWork's culture too much - they just need an office, and WeWork is providing a cost-effective solution. Maybe it's artificial because of VC money - if so, I certainly don't care - it'll be good while it lasts!
For contrast: at my previous company, we also wanted to move to an office (instead of working out of my apartment). We spent a huge amount of time looking at offices, and ended up staying put, because it was hard to find a decent office with a decent price, and signing up for a 2-year lease is a huge commitment which is not fun to make when you don't know the future size of the company - do you get lots more space than you need and pay extra? Do you get less space and are in a tough spot if you grow too fast?
> We're at a WeWork because it's a cheap/easy way to get an office, that we can scale when the company grows with minimal issues since it's month to month
Where is WeWork month to month? Yes the open plan area is month to month, but the instant you try to get a private room they want you to sign a 6 month commitment.
I have not gone to ones in the US, though. This is outside the US. Are they truly, genuinely cancel-any-time month to month? Or "yeah it's month to month but if you cancel before 6 months is up you have to pay 50% of the remaining months"?
I think that's fair. I also think you represent the initial use case and one that's still very relevant today. WeWork has made it clear though that real growth for them now needs to come from mid and large companies willing to use their services at scale and have had some success doing that. I would pivot a little away from OP's "human sentimental" angle and more towards "this obvious ethical lapse, and a board that can't or won't control it" will make those larger organizations pause before becoming too dependent upon WeWork.
I never got that image from WeWork. Anyone around during late 2008-2009 knows what happened to leases and rents. It seemed apparent from the beginning that WeWork was just exchanging future risk for current cash, and thus everything else was marketing farcical bullshit.
The fact that no one can actually do real work at a WeWork was just icing on the shit pie.
I'm currently in a non-WeWork co-working space. It's not clear what you mean with "The fact that no one can actually do real work at a WeWork was just icing on the shit pie.".
> The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.”
This is all just marketing. It's like believing all the actors in a commercial really are elated and blissful just because they chose the right brand of soda.
But I think it's very important to remember that companies can have moral standards and follow them. Many companies don't sell-out in crucial ways, and throwing one's hands up and condemning them all is punishing the ones that stay true.
I think moral outrage is a very important and effective market force. It will do things our government never could, like take down facebook. I'm glad we have this tool.
To add to what the other commenter noted about varying levels of truth...
There is marketing of product and then marketing of company and then marketing of person/people. Not only does each have varying levels of truth, but each also has varying types of intent. The later in SV seems designed to encourage beliefs about a person or company that are immune to facts that counter them.
Branding it as marketing starts, to me, to sound like a convenient cover for propaganda.
Marketing can be based on varying depths of truth. Generally speaking, the greater the depth the greater the long term value and efficacy of the marketing.
(Marketing is not always a veneer.)
petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.”
It’s pathological. WeWork, Google, Facebook and all the rest don’t need to shaft their cleaners, catering staff, security guards etc. The cost is a rounding error and it’s directly antithetical to their stated brand values. But they just can’t help themselves.
I believe there was a NYT story posted last year about how all custodial services are contracted out these days, and ye olde American success story of 'going from the janitor supply closet to the boardroom' was gone forever. The used an example of a cleaner at HP in the early '80s who became a manager of some sort.
The comments on that article? Mostly something along the lines of "maximizing shareholder value" and "fiduciary duty to the corporation". Anything to avoid having to admit that this is wrong.
WeWork’s customers are also maintaining their own curated narrative. Many of them don’t actually care about ideology, they just want a hip co-working space where they can drink beer and socialize with other startups and “crush it” everyday.
It’s only fitting that the owner would also be full of shit.
I won't vote you down, but I think this is a pretty gross generalisation, is it not?
For every person shouting about crushing it and hammering back booze there are another handful quietly getting on with their work, happy to have an office space with stable, fast internet, clean, stocked kitchens, 24 hour access and clean, comfortable spaces - where they don't have to worry about sorting bills and contracts, cleaners, etc etc etc.
As part of an investment round for WeWork in 2014, he was
granted Class B shares that gave him 10 votes per share,
and now he has more than 65% of the overall share vote,
according to WeWork corporate filings.
These multi-class ownership structures need to be reformed. The SEC is already thinking about it [0].
Well, one could argue the more complex the ownership structure is capable of being, the more opportunity for abuse arises.
For example, by saying he has "special" shares that grant him 10x the votes of "normal" shares, he can sell way more than 50% of the company and retain 100% control.
This means shareholders are 100% along for the ride, and get no say in how he runs the business.
I could see a strong argument for the SEC coming down hard and saying "Okay, enough is enough. 1 share, 1 vote."
I'm not opposed to the use of multi-class shares in private companies, but for public companies I think that they should be phased out in line with the proposal from the SEC commissioner's speech. The self-dealing in the OP is another matter entirely -- and potentially worthy of a shareholder lawsuit for breach of fiduciary duty.
There is a competitive element when lots of VC money is chasing hot investments — the company has leverage to get investors to accept unfavorable terms. It is an aspect of our bubbly financial climate, like the boom in "covenant-lite" loans.
Also, there is a Ponzi-like aspect to VC funding in general, where incentives favor ever-rising valuations rather than the cultivation of sustainable, profitable businesses.
Unnecessary, no one is being duped into investing in a business in which they have no say. If they deem it's worth the additional agency risk, then they should be able to afford it, if not, they and others will learn going forward.
There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests.
Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies?
It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.
(fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not? Surely you take as much money from the investors as you can and pocket exactly as much as you can get away with without being prosecuted? Anything less would be economically inefficient! /s)
It's worth noting that luminary capitalists like Adam Smith were very much concerned with privately enabled rent seekers in addition to government enabled ones.
There's nothing inherently capitalist about corruption. It's a property of power, not capitalism.
fundamentally I'd like to believe these are exceptions to the rule. There are capitalists like this but they're a sort and don't represent the lot of us.
A key differentiator between the two is perhaps those that complain about capital gains tax effectively "taxing them twice".
oho, you are also the company?
fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not?
Capitalists are also concerned about conflicts of interest.
Anything less would be economically inefficient! /s)
Smart, far-seeing capitalists are able to see beyond mere legalities. Too much cronyism makes capitalism less efficient, because it starts to resemble centrally planned economies.
This happens even on the small scale. My SO was an exceptionally good paralegal at a law firm that was imploding due to issues like this, so after encouraging her, she convinced her boss to leave the firm and they started their own. It started doing well very quickly, and suddenly the lawyer she was working for became the very thing he hated in the first place. Doing stuff like spending 10-15k a month on the firms American express on hunting trips, spending so much time hunting he's in the office half the year, pulling multiple 5k "disbursements" a month for himself (on top of salary), to the tune of nearly 40k a month in personal expenses, and then for a few months had to take out a loan to meet payroll!
Thankfully she sees the writing on the wall and is about to get her CPA and bounce, and I'm going to laugh when it all collapses around him because she's basically running the firm, but lawyers have a racket so you can't do profit sharing with the non lawyer plebs (by law) like paralegals so she gets a fraction of the pay to do most of the work while he lives the high life, which is exactly what imploded the old firm!
Among the ambitious and entrepreneurial, this sort of behavior is nothing new.
In his autobiography, Benjamin Franklin relates how he found himself as a government official for the colony of Pennsylvania and then proceeded to hire his own printing shop whenever his office needed to publish a widely circulated document or pamphlet.
I think the perception has changed a great deal since then. Note that the USA government hired on a spoils-based system until 1883: https://en.wikipedia.org/wiki/Spoils_system
It would be brilliant to see an analysis of how commonplace this and other types of corruption were historically and geographically.
It’s funny when companies do things that harm the public directly or indirectly, we get high minded passionate economists or whomever telling us how companies have a sacred duty to maximize shareholder value, blah blah blah.
When you see countless companies get looted and crushed by private equity takeovers, to the point that middle schoolers can predict with accuracy when a company will vaporize, you get analysts with nonsensical stories about turnarounds, etc.
But when self-dealing management use the company to enrich themselves in a way that is at best ethically questionable, you don’t hear too much.
Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway!
A CEO being the landlord strikes me as a big potential conflict of interest. For example, if the company needs to move to a larger space to grow, the CEO might want to delay to avoid losing income. Perhaps the company might have a prospective buyer who'd want to relocate everyone to their campus. In that case, there would be an external incentive for the CEO not to make the deal.
Why wouldn't levandowski just employ his own company to supply components he was procuring for Google?
The way this used to work, is that the employee would become aware of a market need because the current company had that need and would be a great customer, so the employee spins out her own business, then leaves to run it.
Some people say that McDonald's Corp is not a restaurant, but a real estate company. They get other people to own and run the restaurants, but they buy and lease the land to them at a profit.
So how is this different than WeWork's CEO owning the building and leasing it to WeWork?
That is not what happened. The Chairman was buying Sears out of bankruptcy using his fund. He didn't approve it, an independent law firm did (they rejected his first bid), and it still has to be approved by a bankruptcy judge, which isn't a foregone conclusions, since Sear's unsecured creditors are going to fight it.
Yeah, this is not just in SV. Conflict of interest seems to be one of those things, in the last 20 years or more, that people do not give a shit about. I've seen it in a lot of places, and when I have conversations about it with smart friends, I don't get a rise out of anyone. I can only imagine what the average, working-class Joe/Jill think. If I had a conversation with them, they'd probably think I was some kind of nut.
To me, this smells like American culture just being corrupt.
It's been sold in the media for years, if you're successful then everything is permissible because "job creators". If you constantly glorify crime, that's how you get more criminals.
The fish rots from the head, and there's a pretty big precedent at the head of the US government in terms of conflict of interest.
It's also worth noting that the US maybe 20 years ago was somewhat exceptional when it comes to conflicts of interest. In other cultures, personal relationships and personal vested interests that we would consider "corrupt" are a load-bearing part of the social structure. So perhaps we're reverting more to the global mean on this point.
This type of behavior is nothing new. Years ago, I worked as a developer at a very large silicon valley based company. Everyone here would recognize their name.
It was common knowledge that the "corporate art" on the walls of the buildings was owned by various members of the "C-Suite" and leased back to the company.
Don't even get me started on the private loans given to members of the C-Suite and Board then subsequently "forgiven".
I used to rage about it every time they published their financials.
Reminds me of Galt's Gulch, where all the good guys name companies after themselves, and all the bad guys name themselves something generic like "Associated Steel".
> Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway!
The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty.
Less relevant in WeWork's case, but very relevant in Tesla's case, since it's a public company, and in fact Tesla and Musk have been sued for neglecting their duties before:
>The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty.
Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. It's like investing in Sears under Eddie Lampert; you have to be a moron to put your money into Sears stock when it's obvious the guy is solely working to drain as much money out of Sears and into his own bank account as possible. And a lawsuit, even if you win, isn't going to net you much money.
Some investors have decided that the best returns come from companies that have CEO's/leaders that run them like sole proprietorships. This works best when the CEO is actually the founder of the company. Investors with this philosophy would like to have that person have majority ownership of the company, but this rarely (never?) financially possible. Some companies have stock step ups that let the founder(s) keep voting control even though they don't have the majority of the stock. Google, Facebook, and Snap are some companies like this.
Other very successful companies that have/had a single person that basically runs the whole place as their own company are Berkshire Hathaway, Apple, Oracle, Microsoft, Amazon. The top five American companies by market cap are of this type. I would not say the this is such a bad thing as these people are looking out for the companies long term future. Compare HP before and after the founders left. Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. If society needs these huge corporations (maybe we would better of with out them?), I would much rather they be run by a single human than be a soulless bureaucracy with a figurehead at the top.
If Neumann fully owned WeWork, it would not be corrupt self enrichment to own the properties, just vertical integration. If the investors want them to work this way, is it really corrupt? I wouldn't think so.
>Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases.
I'm not a big fan of HP, and I especially abhor the inkjet printer business, but I'd like to point out there's more to HP (and even their printers) than this. Their business printers are still pretty good AFAICT.
My simple rule when contemplating a printer purchase: "do not ever, ever, ever buy an inkjet printer".
Sorry for the naivete, but isn't that a solved problem in corporate governance, with standard procedures for making sure that company A isn't just a sockpuppet for shoveling money into company B?
You shouldn't apologize, because it was a mostly solved problem and times changed. Search "corporate opportunity doctrine". It became unsolved in the last 30-40 years.
Corporate Governance doesn’t help when either the board is just a rubber stamp for the CEO or the CEO still holds a controlling stake in the company.
And in the case of successful founders, even without a controlling stake, just their reputation makes it harder to go against the CEO. Could anyone on the board have challenged Gates or Steve Jobs 2.0? In the modern era, who would challenge a decision by Bezos or Hastings?
Yes, he sold property that Sears owns to companies he controls to fund stock buybacks from himself (and his companies), becoming Sears' landlord in the process.
>Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies?
Don't forget Michael B. Rothenberg:
>The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.
I think its a clear conflict and shareholders should protest, but this happens at every level of the economy. I used to work buying small businesses. Its common for business owners to also own the building in a separate LLC. And its great to hear them complain about how they always get paid last, when they have been paid every month through rent.
In the Phoenix metro area we have BASIS schools that use a similar tactic… with public education funds. The school and foundation are non-profit, but they use a for-profit management company that's owned by the founders of the schools. No transparency is required for the private business which provides teachers(!) and other back-office services.
Of course, the founder is living meagerly like most educators (including the ones he employs or the one's he's taking funding away from)… wait, no, he's raking in the cash.
That said, BASIS provides an excellent environment for students that are compatible with its education model (read: students who would have been successful anywhere).
This isn't just a silicon valley archetype. It's a cultural archetype. Ownership is the religion we're indoctrinated with.
To paraphrase James Madison, the Senate ought to protect the minority of wealthy owners from the majority. Deference to wealth and ownership is in the DNA of the country.
America is a tacit caste system, heavily indoctrinated to believe it's a freer place than it is. While there's a stronger guarantee of freedom of speech/expression than other countries, who owns our time/effort is rarely ever discussed and the realities of it questioned. The owners do, of course, and direct it to their desires.
I couldn't read the full article since I am not a WSJ subscriber, so forgive the naivete, but what inherently is wrong in Neumann leasing a building that he owns ? I mean, he could have rented that building to someone else, instead he is leasing it out to WeWork.
How did get get the money to buy that building - if he is siphoning money from WeWork revenues and using that, that's illegal I suppose. If he used Wework stock options as collateral to finance the building, that could be some grey area I guess.
Is WeWork paying market rent to Neumann, or is it paying more? Did Neumann negotiate vigorously with Neumann for the best possible rate? With real estate, how could you tell?
CEOs have a fiduciary responsibility to the other stakeholders of their companies. That's the problem here.
But is Neumann is the sole shareholder? Musk certainly is not Tesla's sole shareholder. If Musk pays himself through some juicy Tesla contract, he is fleecing other shareholders.
>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests.
I'd rather this was the case completely -- privately owned, extensions-of-oneself companies and we had no BS like boards and stockholders...
>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests.
100% with you here.
When companies grows so much ego becomes part of the game.
Well I mean that's the consequence of capital ownership isn't it? It's not like these people are operating under some kind of constitutional obligation to their staff or anything.
It is a product of personality. It takes a certain amount of risk aversion to risk everything to start a company, but that isn't what this is about. This is about investment and it takes selling yourself to convince people to give you money. A good sociopath lives for convincing people to give them what they want without reasonable limits.
Fortunately, most people are not sociopaths, but unfortunately most of these people will not achieve the successes you described.
Maybe they would, if the sociopaths wouldn't assimilate many of those "successes". I consider a certain number of successful businesses to be a relatively stable statistical certainty in a society which provides the necessary environment for them (stable legislation, infrastructure, workers, a market to sell stuff etc.).
The sociopaths now don't increase the total number of these successes, but they tilt the distribution of successes towards themselves as a group, thereby making non-sociopaths less likely to achieve a success.
Let's not look at Shkreli like that. He's a guy who opposed FDA approval of a drug. Not based on its effectiveness, or medical benefit, but because it would interfere with his profits from a competing, inferior drug.
This is not someone who has a strong history of "the right thing to do".
This reminds me of the boardgame 1830 Railways & Robber Barons. You're an investor buying shares in railroad companies, and personally running any railroad of which you are the largest shareholder. A popular opening strategy is to first buy an expensive private company, then start a public company and have the public company buy your private company at inflated price.
It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you).
In one of the Railroad Tycoon games, I forget which, some scenarios come with a goal for your personal wealth. The narrow path there be via investing your salary in your own company and then raising dividends. But that would of course benefit all the shareholders.
Instead you would get there by first crushing a competing business, as you would in most scenarios anyway. Then you would buy all the worthless stock you could with your meager salary. Finally you could make an outrageously overpriced buyout offer for the worthless business.
1830 is such an amazing game. Also, a personal shout-out for 1856, its sibling game set in Upper Canada. That game is all about making money before everything gets bought up.
There are actually dozens of games in that genre. 1835 in Germany is very constructive and buildery, and aggressive 1830-style play is not going to do you any good. 1841 in Italy is epic in its complexity; borders popup and disappear, forcing splits and mergers. Companies can buy each other and start new subsidiary companies. There are several games in England, France, Europe as a whole, India, China, Russia, the Isle of Wight, several games for individual states in the US, and most recently, Lilliput. Many of them self-published. Worth checking out if this is your thing.
18EU is probably my favourite. Feels epic, but plays remarkably quickly.
This series of board games taught me a lot about vulture capitalism, and in particular the fine difference in incentives between a mere shareholder and someone with control over an entity. Depending on how the markets and ownership rules are set up, the most effective way to build wealth may be to just play clever games with share flipping and asset transfers between companies that you have controlling stakes in. Building value is for chumps.
For the people in this thread wondering whether this is ok: double dipping is never ok.
Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad.
The board might not be able or want to force him out right now, but long term the tone has been set.
...for companies that are structured as public companies.
If your companies are all private, with no investors, go ahead and do whatever you like. It's all just your money, (or your family's money), anyway.
But to do that with money from public investors is, and this is only my opinion, but I think it's extremely unethical. Obviously the issue is that there is nothing explicitly illegal about what people like the WeWork CEO are doing. I'm not sure why?
I'm not a lawyer, but I suspect this may cause you to lose the liability protection of the corporation. From [1]:
"The veil of liability protection provided by an entity may be pierced based on the following theories:
Alter Ego Theory. If you run your company as little more than your “alter ego,” as a mere extension of yourself (this will generally be the case where there is a lack of separateness between you individually and the company itself, due to commingling of funds, lack of proper governance, and other factors)."
> there is nothing explicitly illegal about what people like the WeWork CEO are doing
Not sure why you say that. This seems to be textbook self-dealing, which is illegal under Delaware law (where WeWork is incorporated) unless the self-dealing party can demonstrate fairness:
http://www.sgalaw.com/news-and-views/2014/11/24/self-dealing...
I think you honed in on a key issue: "pick a provider".
There's nothing wrong with the current "arrangement", but there might be a lot wrong with the way the arrangement came to be.
Or said another way, there aren't any ethical issues with WeWork renting a building from one of the owners in an above-board lease arrangement. The way WeWork chose that building and reevaluates its lease may have some issues.
Is that true? For example, PayPal's CEO is Dan Schulman, Schulman is the head of the board of Symantec, and PayPal has to use all Symantec products in every category where they sell a product.
The ex-CEO at my wife's previous company did this. Signed a multi-year lease for the company on a building she owned a few months before leaving the company.
A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.
My wife's church sold a multi-million dollar parcel to the museum across the street because one of the church members is a real estate agent and made a commission.
This not only denied the church any revenue from making the parking lot a parking garage as the museum did but prevented them from doing anything else with the land in case of expansion or simply a future sale if they move. Talk about stepping over dollars to pick up pennies.
This is basically the textbook definition of conflict of interests.
Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).
"The building’s value, meanwhile, has gone up, and the owners have been able to borrow more money by refinancing the property’s debt. Late last year, Messrs. Neumann and Tahari took out a $77.5 million loan, according to loan adviser Meridian Capital Group, $7.5 million more than the prior loan to buy the building."
I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so?
The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?
Readit News
The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him.
As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction.
As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.”
This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.
We're not at WeWork because of hype, or the image of the CEO, or anything like that. We're at a WeWork because it's a cheap/easy way to get an office, that we can scale when the company grows with minimal issues since it's month to month. We shopped around a few competitors, WeWork happened to be the best combination of price vs. space vs. availability, so we went with that.
I haven't exactly done a poll, but I doubt that most WeWork customers know or care about WeWork's culture too much - they just need an office, and WeWork is providing a cost-effective solution. Maybe it's artificial because of VC money - if so, I certainly don't care - it'll be good while it lasts!
For contrast: at my previous company, we also wanted to move to an office (instead of working out of my apartment). We spent a huge amount of time looking at offices, and ended up staying put, because it was hard to find a decent office with a decent price, and signing up for a 2-year lease is a huge commitment which is not fun to make when you don't know the future size of the company - do you get lots more space than you need and pay extra? Do you get less space and are in a tough spot if you grow too fast?
Where is WeWork month to month? Yes the open plan area is month to month, but the instant you try to get a private room they want you to sign a 6 month commitment.
I have not gone to ones in the US, though. This is outside the US. Are they truly, genuinely cancel-any-time month to month? Or "yeah it's month to month but if you cancel before 6 months is up you have to pay 50% of the remaining months"?
The fact that no one can actually do real work at a WeWork was just icing on the shit pie.
This is all just marketing. It's like believing all the actors in a commercial really are elated and blissful just because they chose the right brand of soda.
Like a luxury alcohol makers, they are selling identity, not chair by hour.
But I think it's very important to remember that companies can have moral standards and follow them. Many companies don't sell-out in crucial ways, and throwing one's hands up and condemning them all is punishing the ones that stay true.
I think moral outrage is a very important and effective market force. It will do things our government never could, like take down facebook. I'm glad we have this tool.
There is marketing of product and then marketing of company and then marketing of person/people. Not only does each have varying levels of truth, but each also has varying types of intent. The later in SV seems designed to encourage beliefs about a person or company that are immune to facts that counter them.
Branding it as marketing starts, to me, to sound like a convenient cover for propaganda.
It’s pathological. WeWork, Google, Facebook and all the rest don’t need to shaft their cleaners, catering staff, security guards etc. The cost is a rounding error and it’s directly antithetical to their stated brand values. But they just can’t help themselves.
The comments on that article? Mostly something along the lines of "maximizing shareholder value" and "fiduciary duty to the corporation". Anything to avoid having to admit that this is wrong.
It’s only fitting that the owner would also be full of shit.
For every person shouting about crushing it and hammering back booze there are another handful quietly getting on with their work, happy to have an office space with stable, fast internet, clean, stocked kitchens, 24 hour access and clean, comfortable spaces - where they don't have to worry about sorting bills and contracts, cleaners, etc etc etc.
Which should tell you something's up with their finances.
[0]- https://www.sec.gov/news/speech/perpetual-dual-class-stock-c...
So when WeWork responded with
-"The board is aware of it and has approved it"
they probably meant
-"Neuman is aware of it and has approved it" right ?
For example, by saying he has "special" shares that grant him 10x the votes of "normal" shares, he can sell way more than 50% of the company and retain 100% control.
This means shareholders are 100% along for the ride, and get no say in how he runs the business.
I could see a strong argument for the SEC coming down hard and saying "Okay, enough is enough. 1 share, 1 vote."
1. How divorced the financial markets are from the real economy.
2. How broken all our voting systems are.
Choose your narrative.
2008 didn't substantively re-tether the financial markets to the real economy.
Governance mechanisms are beginning to crack.
Also, there is a Ponzi-like aspect to VC funding in general, where incentives favor ever-rising valuations rather than the cultivation of sustainable, profitable businesses.
Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies?
It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.
MG Rover: https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-...
BHS: https://www.theguardian.com/business/2018/mar/27/philip-gree... / https://www.theguardian.com/business/2017/feb/28/philip-gree...
Maplin: https://www.taxresearch.org.uk/Blog/2018/02/28/40831/
(fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not? Surely you take as much money from the investors as you can and pocket exactly as much as you can get away with without being prosecuted? Anything less would be economically inefficient! /s)
There's nothing inherently capitalist about corruption. It's a property of power, not capitalism.
A key differentiator between the two is perhaps those that complain about capital gains tax effectively "taxing them twice". oho, you are also the company?
Capitalists are also concerned about conflicts of interest.
Anything less would be economically inefficient! /s)
Smart, far-seeing capitalists are able to see beyond mere legalities. Too much cronyism makes capitalism less efficient, because it starts to resemble centrally planned economies.
Thankfully she sees the writing on the wall and is about to get her CPA and bounce, and I'm going to laugh when it all collapses around him because she's basically running the firm, but lawyers have a racket so you can't do profit sharing with the non lawyer plebs (by law) like paralegals so she gets a fraction of the pay to do most of the work while he lives the high life, which is exactly what imploded the old firm!
You ought to watch out for your SO and this fella :P
In his autobiography, Benjamin Franklin relates how he found himself as a government official for the colony of Pennsylvania and then proceeded to hire his own printing shop whenever his office needed to publish a widely circulated document or pamphlet.
BTW, that autobiography is a great read. you can find it for free on Project Gutenberg: http://www.gutenberg.org/files/20203/20203-h/20203-h.htm
It would be brilliant to see an analysis of how commonplace this and other types of corruption were historically and geographically.
When you see countless companies get looted and crushed by private equity takeovers, to the point that middle schoolers can predict with accuracy when a company will vaporize, you get analysts with nonsensical stories about turnarounds, etc.
But when self-dealing management use the company to enrich themselves in a way that is at best ethically questionable, you don’t hear too much.
Once mutual funds and pension funds start investing in WeWork, then I’ll care.
A CEO being the landlord strikes me as a big potential conflict of interest. For example, if the company needs to move to a larger space to grow, the CEO might want to delay to avoid losing income. Perhaps the company might have a prospective buyer who'd want to relocate everyone to their campus. In that case, there would be an external incentive for the CEO not to make the deal.
Why wouldn't levandowski just employ his own company to supply components he was procuring for Google?
The way this used to work, is that the employee would become aware of a market need because the current company had that need and would be a great customer, so the employee spins out her own business, then leaves to run it.
So how is this different than WeWork's CEO owning the building and leasing it to WeWork?
He's essentially acting like Ray Kroc.
Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.
To me, this smells like American culture just being corrupt.
EDIT: typo
It's also worth noting that the US maybe 20 years ago was somewhat exceptional when it comes to conflicts of interest. In other cultures, personal relationships and personal vested interests that we would consider "corrupt" are a load-bearing part of the social structure. So perhaps we're reverting more to the global mean on this point.
It was common knowledge that the "corporate art" on the walls of the buildings was owned by various members of the "C-Suite" and leased back to the company.
Don't even get me started on the private loans given to members of the C-Suite and Board then subsequently "forgiven".
I used to rage about it every time they published their financials.
Also Tesla is not named Musk, or Amazon, Bezos.
The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty.
Less relevant in WeWork's case, but very relevant in Tesla's case, since it's a public company, and in fact Tesla and Musk have been sued for neglecting their duties before:
https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo...
Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. It's like investing in Sears under Eddie Lampert; you have to be a moron to put your money into Sears stock when it's obvious the guy is solely working to drain as much money out of Sears and into his own bank account as possible. And a lawsuit, even if you win, isn't going to net you much money.
Other very successful companies that have/had a single person that basically runs the whole place as their own company are Berkshire Hathaway, Apple, Oracle, Microsoft, Amazon. The top five American companies by market cap are of this type. I would not say the this is such a bad thing as these people are looking out for the companies long term future. Compare HP before and after the founders left. Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. If society needs these huge corporations (maybe we would better of with out them?), I would much rather they be run by a single human than be a soulless bureaucracy with a figurehead at the top.
If Neumann fully owned WeWork, it would not be corrupt self enrichment to own the properties, just vertical integration. If the investors want them to work this way, is it really corrupt? I wouldn't think so.
I'm not a big fan of HP, and I especially abhor the inkjet printer business, but I'd like to point out there's more to HP (and even their printers) than this. Their business printers are still pretty good AFAICT.
My simple rule when contemplating a printer purchase: "do not ever, ever, ever buy an inkjet printer".
And in the case of successful founders, even without a controlling stake, just their reputation makes it harder to go against the CEO. Could anyone on the board have challenged Gates or Steve Jobs 2.0? In the modern era, who would challenge a decision by Bezos or Hastings?
Check Carlos Ghosn's ongoing story for example
Don't forget Michael B. Rothenberg:
>The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.
Of course, the founder is living meagerly like most educators (including the ones he employs or the one's he's taking funding away from)… wait, no, he's raking in the cash.
That said, BASIS provides an excellent environment for students that are compatible with its education model (read: students who would have been successful anywhere).
To paraphrase James Madison, the Senate ought to protect the minority of wealthy owners from the majority. Deference to wealth and ownership is in the DNA of the country.
America is a tacit caste system, heavily indoctrinated to believe it's a freer place than it is. While there's a stronger guarantee of freedom of speech/expression than other countries, who owns our time/effort is rarely ever discussed and the realities of it questioned. The owners do, of course, and direct it to their desires.
Which shows that outcome is not all that matters, legally.
How did get get the money to buy that building - if he is siphoning money from WeWork revenues and using that, that's illegal I suppose. If he used Wework stock options as collateral to finance the building, that could be some grey area I guess.
CEOs have a fiduciary responsibility to the other stakeholders of their companies. That's the problem here.
I'd rather this was the case completely -- privately owned, extensions-of-oneself companies and we had no BS like boards and stockholders...
100% with you here.
When companies grows so much ego becomes part of the game.
I think it goes beyond that, by people viewing whole states as such extension
Fortunately, most people are not sociopaths, but unfortunately most of these people will not achieve the successes you described.
Isn't business defined as enrichment of the shareholders?
So (depending on who owns the shares) it really shouldn't be amazing, right?
Dead Comment
This is not someone who has a strong history of "the right thing to do".
It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you).
It's absolutely a robber baron move.
Instead you would get there by first crushing a competing business, as you would in most scenarios anyway. Then you would buy all the worthless stock you could with your meager salary. Finally you could make an outrageously overpriced buyout offer for the worthless business.
18EU is probably my favourite. Feels epic, but plays remarkably quickly.
Also very confusing for shareholders. CEO not motivated to find more affordable options.
Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad.
The board might not be able or want to force him out right now, but long term the tone has been set.
...for companies that are structured as public companies.
If your companies are all private, with no investors, go ahead and do whatever you like. It's all just your money, (or your family's money), anyway.
But to do that with money from public investors is, and this is only my opinion, but I think it's extremely unethical. Obviously the issue is that there is nothing explicitly illegal about what people like the WeWork CEO are doing. I'm not sure why?
"The veil of liability protection provided by an entity may be pierced based on the following theories:
Alter Ego Theory. If you run your company as little more than your “alter ego,” as a mere extension of yourself (this will generally be the case where there is a lack of separateness between you individually and the company itself, due to commingling of funds, lack of proper governance, and other factors)."
1 https://businessattorneyinaustin.com/llc-corporation-liabili...
Not sure why you say that. This seems to be textbook self-dealing, which is illegal under Delaware law (where WeWork is incorporated) unless the self-dealing party can demonstrate fairness: http://www.sgalaw.com/news-and-views/2014/11/24/self-dealing...
There's nothing wrong with the current "arrangement", but there might be a lot wrong with the way the arrangement came to be.
Or said another way, there aren't any ethical issues with WeWork renting a building from one of the owners in an above-board lease arrangement. The way WeWork chose that building and reevaluates its lease may have some issues.
Is that improper?
A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.
This not only denied the church any revenue from making the parking lot a parking garage as the museum did but prevented them from doing anything else with the land in case of expansion or simply a future sale if they move. Talk about stepping over dollars to pick up pennies.
Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).
I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so?
The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?