- Jonathan Price reflects on “the greatest ever reward for failure”, a sum of $1.2 billion, which was paid out to WeWork’s founder, Adam Neumann.
- Softbank invested $18.5 billion into WeWork, and yet the company plunged from a peak valuation of $47 billion to $2.9 billion in 2020.
- Price explores why there is a reluctance in big business to make executives pay for their failure, and asks the question: Why didn’t Softbank resist such a big payoff?
Regular readers of my articles in Allwork.Space will not need to be told what is the subject of this article. But for anyone new to my writing, the greatest ever reward for failure in the history of American business is the sum to be paid to Adam Neumann, former CEO of WeWork.
He is reported to be receiving a total package of $1.2 billion (approximately, but who’s arguing about the odd $100 million?) as well as a refinancing of a loan package, on ‘favourable’ terms, as a reward for losing his shareholders the largest amount of money in the shortest time ever in the history of the world.
Actually I am not sure of the accuracy of the last part of that sentence, but frankly, who cares if it’s the largest or the second largest, as it’s a truly remarkable feat in either case?
How did it happen and what does it say about the state of the world today?
To understand how the valuation of WeWork plunged from a peak of $47 billion prior to its aborted IPO in 2019 to $2.9 billion as at 31 March 2020, you have to see that Adam Neumann is not a businessman, but rather a visionary, a guru.
In his very readable book about the epic rise and fall of Adam Neumann, Billion Dollar Loser, Reeves Wiedeman describes how, at their first meeting, Neumann showed him the original pitch deck from 2009, before WeWork had opened its first office.
The deck included a number of We branded businesses such as WeBank and WeSail embodying the idea of the community as the business. In fact, even at that stage WeWork had re-branded itself as the We Company comprising WeWork, WeLive and WeGrow with the overall aim of making the world a better place, or “elevating the world’s consciousness” — the new mission statement.
If you or I attempted to raise capital from investors for the purpose of raising the world’s consciousness, we would undoubtedly be shown the door fairly swiftly.
But then we do not have the mix of “grit, luck, charm, ruthlessness, impeccable timing and chutzpah” of Adam Neumann, who despite being a college dropout, on the point of being expelled from the USA, managed to mix business and spirituality together in an intoxicating mixture that appealed to the Obama era zeitgeist of We Can.
It undoubtedly helped that Adam is tall, good looking and stands out from the crowd, dressing very informally even by the informal standards of the 21st century, often going barefoot, and lubricating his business meetings, not with the usual tea or coffee, but with shots of tequila.
Adam also possesses a massive ego and self-belief.
These are the usual ingredients of hubris, as shown by his later fall from grace, but it was that self-belief that attracted the attention of Masayoshi Son, founder of Softbank and WeWork’s principal investor. Son advised Adam to expand his ambitions and accelerate his growth.
Son’s Vision Fund eventually invested $18.5 billion into WeWork, the capital that allowed it to grow so fast in so many cities around the world, becoming at one point, the second largest occupier of office space in London, after the UK government.
The use of flexible office space, whether you refer to it as coworking space, or as serviced office, executive suite or business centre space, as a tool to promote community has been recognised for at least 30 years if not more, so WeWork did not invent the idea.
Serviced office operators have been encouraging their business clients to network with each other and to mingle in breakout areas since the 1990s. What WeWork did was to see this community as a means of value creation for the operator, and to sell that philosophy to investors. The problem with that philosophy is that office space is not a very good tool for monetising the value of a community, because it is too physical, too tangible and there is a limit as to what you can do with it.
WeWork’s biggest impact on office space has been to increase office density by reducing desk size, though this has recently been blunted by the requirement for social distancing.
Perhaps the biggest long-term effect that WeWork has had on the coworking industry was its use of Vision Fund’s firehose of cash to raise awareness among potential customers, something that Regus’s advertising had been doing on a smaller scale for decades.
We do not yet know how much money Softbank and other investors will have lost on their investments in WeWork, but even a conservative estimate would be over $10 billion in cash terms even if the de-spac flotation through BowX is successful at the levels mentioned recently. In terms of written down investment, the amount is of course much higher.
So why is Adam Neumann getting such a huge payoff for his abject failure to make any money?
The answer is probably that Softbank wanted Adam to exit as quickly and cleanly as possible, leaving them free to try and save the business with new management. Given that he and his family interests controlled a large part of the equity, it would have been difficult to remove him without putting the company into bankruptcy.
The question is then why didn’t Softbank try harder to resist such a big payoff to Adam?
It is true that, in April 2020, Softbank did withdraw from a previously agreed tender offer that would have paid Adam almost $1 billion for his stock, but why not take that resistance further and squeeze him down to a more reasonable figure?
I can’t help feeling that there is a reluctance in big business to make executives pay for their failure.
Just as salaries and bonuses have boomed exponentially since the 1980s, severance payments have too. These days, the CEO of a major quoted company can expect to receive tens of millions of dollars in compensation as a minimum, when sacked for failing at what they were paid handsomely to do.
The bigger the failure, the bigger the payoff it seems, contributing to the widening gap between the rich and the poor.
The other problem is that Softbank is paying Adam off with other people’s money, not with its own money. When you are dealing with such large sums of other people’s money, a few hundred million here or there doesn’t make much of a difference.
As long as the current bull market continues, propelled by all the easy money from QE, I cannot see any end in sight to this practice of reward for failure, which does not make it any more justifiable. To quote a former British Prime Minister, Edward Heath, this seems to be “the unacceptable face of capitalism”.
