The WeWork Debacle: Lessons in Governance

September 9, 2019

WeWork’s failed IPO shines a spotlight on corporate governance issues and the dangers of unchecked growth ambitions.

In September 2019, the world watched in stunned disbelief as WeWork, a once-booming startup known for its trendy co-working spaces, dramatically shelved its initial public offering (IPO) after revealing deep flaws in its governance and financial structure. This corporate drama quickly turned into one of the most significant business failures of the year, underscoring the importance of sound governance practices and responsible growth strategies. The WeWork debacle raises important questions about the sustainability of venture-backed companies, the allure of rapid expansion, and the role of corporate governance in preventing such high-profile failures.

WeWork’s downfall offers valuable lessons for the business world—lessons that are not only relevant to other startups but also to larger corporations and investors. At the heart of the scandal was the leadership of CEO Adam Neumann, whose ambition was as boundless as the company’s rapidly expanding operations. While ambition is often seen as a key driver of success, WeWork’s story is a cautionary tale about the dangers of unchecked growth and the lack of proper oversight.

Much like characters from classic English literature who are driven by grandiose visions of success, Neumann’s rise and fall can be seen as a modern reflection of the tragic hero. He was not unlike a figure from Shakespeare’s Macbeth, whose unchecked ambition led to his undoing. Neumann’s unyielding desire to build a global empire was undeniably ambitious, but as the WeWork saga demonstrated, ambition without the grounding influence of strong governance can lead to disastrous outcomes.

The IPO and the Cracks Beneath the Surface

WeWork’s failed IPO was the catalyst for the public revelation of its internal issues. On paper, the company appeared to be on the cusp of an impressive listing, but beneath the glossy surface lay a host of red flags. First, there were concerns about the company’s business model. WeWork had grown rapidly, acquiring properties and expanding operations worldwide. However, the core of its business—renting office space to small companies—was not particularly innovative or unique. The company was essentially taking on large, long-term real estate leases and subletting the space, leaving it vulnerable to market fluctuations.

More troubling, however, were the governance issues. Neumann, the company’s charismatic and controversial CEO, held an outsized amount of control over the firm’s decision-making. His decision to give himself special voting rights meant that, even after going public, he would retain ultimate control over the company. This concentration of power in one individual is a hallmark of poor corporate governance, where accountability is diminished and the interests of shareholders can be easily ignored.

As investors began to examine WeWork’s financials, they discovered that the company had been losing billions of dollars each year. Despite this, Neumann continued to sell a vision of WeWork as a revolutionary company that would transform the way people worked. However, the reality was far less compelling. The company’s financials were a mess, and the valuation of $47 billion that had been placed on the company was simply not sustainable. Investors, who had once been dazzled by the company’s growth, began to question its viability.

A Cautionary Tale of Over-Expansion

One of the key lessons from WeWork’s downfall is the dangers of over-expansion without a solid foundation. Much like the romanticized characters in many novels, the company’s ambition was often untethered from the practical realities of running a business. In Moby-Dick, Herman Melville presents Captain Ahab, whose obsessive quest for vengeance leads to his destruction. Ahab’s relentless pursuit of the white whale, despite the mounting costs and risks, mirrors the unchecked ambition of WeWork’s leadership. Neumann, too, was fixated on his vision of a global empire, ignoring the warning signs that the company was heading in the wrong direction.

WeWork’s rapid expansion—opening new locations in cities across the globe—was one of the factors that contributed to its financial instability. The company’s growth was not built on a sustainable business model, but rather on an unsustainable pattern of borrowing and leasing. WeWork’s core business—renting office space—was inherently risky, as it relied on the ability to attract tenants to fill the spaces. However, as the company grew, it became more dependent on future success to justify its ever-expanding operations. This created a cycle of dependence, where the company’s survival was increasingly tied to its ability to grow faster than its losses, a strategy that is rarely sustainable in the long term.

The Role of Corporate Governance

At the heart of the WeWork debacle is the issue of corporate governance. Effective governance is crucial for any company, but especially for high-growth startups that are under intense pressure to scale quickly. WeWork’s corporate governance was woefully inadequate. Neumann’s control over the company’s board of directors meant that key decisions were made with little oversight. This lack of accountability allowed for the accumulation of risks that ultimately led to the company’s downfall.

Good governance is about more than just having checks and balances in place. It’s about fostering a culture of accountability and responsibility. In Pride and Prejudice, Jane Austen’s characters frequently make choices based on personal judgment, but those choices often lead to consequences—both good and bad—that shape their futures. Similarly, in the world of corporate governance, the decisions made by a company’s leaders have long-lasting consequences. WeWork’s failure to establish a governance structure that could hold its CEO accountable led to the company’s undoing, and the fallout has affected not just Neumann, but also employees, investors, and the broader market.

In the wake of WeWork’s failed IPO, many analysts and investors began to reflect on the broader implications for the startup ecosystem. The lessons from WeWork are clear: unchecked ambition and weak governance can lead to catastrophic failures. Investors, too, must be more discerning in evaluating startups, considering not just the growth potential but also the management structure and the company’s ability to execute on its business model.

The Future of WeWork and Other Startups

While WeWork’s failed IPO was a significant blow to its reputation, it is not the end of the company. After Neumann’s departure, WeWork has attempted to restructure its operations and focus on profitability rather than growth at all costs. However, the damage to its brand and its financials will be difficult to overcome. Whether the company can recover remains to be seen, but its fall from grace serves as a cautionary tale for other startups and venture-backed companies.

For other companies, particularly those in the tech sector, the WeWork saga highlights the importance of building a strong foundation before embarking on an ambitious growth trajectory. Rapid expansion should never come at the expense of financial stability, and governance must be a priority from the outset. In the current environment, investors are increasingly focused on sustainable growth and responsible management, rather than the unrealistic promises of unicorn startups.

As investors and business leaders reflect on the lessons of WeWork, they must consider how to balance ambition with prudence. Much like the protagonists of classic novels who learn valuable lessons through their failures, the business world must learn from the mistakes of WeWork to avoid a similar fate. WeWork’s rise and fall is not just a story about one company; it is a story about the broader dynamics of modern capitalism and the risks of unchecked ambition.

Conclusion

The WeWork debacle serves as a poignant reminder of the importance of sound corporate governance, the dangers of unchecked ambition, and the risks of over-expansion. In the fast-paced world of startups and venture capital, it is easy to become intoxicated by the promise of rapid growth and market disruption. However, as the story of WeWork demonstrates, true success comes not just from ambition, but from a combination of careful planning, responsible management, and strong governance. By learning from the mistakes of WeWork, businesses can build more sustainable models that will stand the test of time.