Tapestries-9 | Did WeLearn nothing?
We’re taking the wrong lessons from the We Company unravelling.
Photo by Nastuh Abootalebi
In the lead up to the Uber and (now aborted) We Company IPOs, I wrote a piece trying to make sense of the growth-at-all-costs narrative. The conclusion from that piece was that we needed to understand incentives in venture capital to understand the behaviour we were witnessing.
At this point in the We story, I feel compelled to reflect upon what’s transpired. Unfortunately, my conclusion is that the current narrative misses the point. The collective authors still don’t get it.
To my mind, the most important part of the story is not the personalities involved, profitability vs. growth or the Softbank experiment. The most important part of the story is about governance. This piece covers the governance story, as well as my personal lessons from it. But first, some context on how we’re still barking up the wrong tree.
What are we talking about?
The story of We, as told through the print media, is a story about Adam Neumann and Masayoshi Son; a story about people. Remarkably, the obsession with individuals and the fetishization of celebrity is what got We (or us?) into this predicament in the first place. This enduring focus smacks of a lack of self-awareness.
To state that the lesson from We is the need for profitability over growth, is to either have a very short memory or a misunderstanding of financial markets. When you strip out the fanfare, at it’s core, this was the public market perfectly fulfilling its function.
A small group of people, high on their own genius, had convinced themselves that We was worth a certain amount of money. Public market investors looked under the hood — at the financials and governance practices — and politely told We and its investors that their valuation and poor governance may pass in the Enchanted Forest of the Unicorns, but does not hold-up to even a sliver of sober scrutiny. In no uncertain terms, they told We to go away and sort itself out. The public market therefore did it’s job in a way that was entirely predictable.
To suggest that this represents a turning point in the ‘growth vs. profitability’ question reveals a hollow understanding of growth and profitability. They are complex concepts, made of up complex factors. The market’s view of growth and profitability oscillates over time. At this relatively late point in the current cycle, it’s simply a re-calibration, not a paradigm shift.
Yes, the question around growth and profitability was the catalyst for the We conversation. But the lessons from this episode are much more important than those we are currently discussing.
We is (hopefully) an edge case, but it was the logical endpoint of our habit of submitting to the cult of celebrity. The narrative is not unique and there will be, and already are, similar stories playing out (albeit with less weed and tequila).
The fact that the coverage of the story to-date remains centred on Adam and Masa is disheartening, and is evidence that we have not learned our lesson. As Scott Galloway points out, we continue to “worship at the altar of innovators and billionaires.” Focusing too much on the individual helped get us into this mess in the first place. If we do not acknowledge this mistake, we will miss this episode’s most important lesson: the importance of…
Governance.
We’s story involves rapid growth, large personalities and high stakes. In this context, governance should have taken on ever-more importance. In reality, it feels like the inverse was true.
There are many curious and bizarre elements to this story. However, what baffles me most is the way We’s Board of Directors have effectively been let off the hook.
A Board is broadly responsible for ensuring an organization is managed in a way that promotes long-term viability and sustainability. It is meant to achieve this through instituting robust legal, financial and governance policies, and to hold the executive team accountable to them. By most public measures, We’s Board failed.
One of my favorite books is Predictably Irrational by Dan Ariely; it’s a fantastic read about understanding what makes those around us ‘tick.’ Adam’s conduct was irrational, but it was predictable. Simply stated, he understood the incentives inherent in the structure he created better than anyone else. From a shareholder perspective (which includes a large number of employees), the exit package he received is egregious. However, in a more dispassionate view, he was simply extracting maximum value from the power the Board and his investors gave him.
There is precedent (sort of) for the level of control granted to Adam: Mark Zuckerberg at Facebook. Say what you want about Zuckerberg, but he is a brilliant CEO. Venture capital investors are no strangers to providing founder-friendly terms and handing over disproportionate control to rockstar-founders; competition for the best investments is high, and they have to pitch too. However, in the same way that saying your business is the ‘Amazon of X’ is a terrible strategy, so is thinking that the founder you just gave total control to is the next Zuckerberg. In the incredibly likely scenario he’s not, you’re going to have a problem on your hands when things head south.
Where a Board submits to the personality cult and hands over total control to the CEO, the prospect for any form of governance is low. This is especially disappointing given the pronounced need for governance in dynamic, high-stakes investing, where human impulse and animal instincts are heightened.
The naive conclusion here is that the Board just did a bad job. I think a more nuanced view is that the Board members simply sought to further the interests of the specific shareholder they were representing. Other than Softbank (which appears to have its own major internal governance issues), they were operating with asymmetric upside. If this charismatic and enigmatic CEO could get the IPO off the ground, it would represent the investment of a lifetime. If he couldn’t, they’d still profit handsomely. For them, it was a question of delta, not ‘good’ or ‘bad’. Again, predictably irrational.
Ultimately, what really irks me is that employees are largely the ones left holding the bag. They were sold the same dreams, without the same protection or input at Board-level. For them, the impact to their balance sheets is potentially life-changing, not just a matter of delta.
In my view, the Board failed because it undermined its own function, was in thrall to its visionary CEO, and each member operated in their own relative self-interest. To my knowledge, it has not been held accountable in any real sense for the trainwreck of the last few months.
My personal lessons from this episode
1- The importance of original thinking
Board members are selected for their specific insights and experience. On an appropriately constructed Board, their insights and views will be considered a form of original thinking; they are there because they bring something valuable that others can’t. In this qualified context, original thinking is immensely valuable.
In this case, the forum within which there was a lack of original thinking was We’s Board i.e. why didn’t someone put forward a view that the company’s financial trajectory and lax governance may pose existential threats? This view wasn’t necessarily original, but was scarce at Board level. The same construct applies when we think about original thinking in other contexts.
It’s no secret that we live in our own echo chambers, which can take different forms: an incredibly homogeneous venture capital community, or a stridently progressive political movement. We all create our own personal blindspots by virtue of immersion in a particular group. Whether it’s a Board, our community or our friends, original thinking has real value.
To me, writing is a way to refine these viewpoints, and is an attempt at training the ability to communicate them clearly.
Lesson #1: To be a truly valuable member of the groups we associate with, we should strive to think independently and provide alternate viewpoints (especially if they prove unpopular).
2- My ‘Board of Directors’
I’ve been thinking about Boards a lot recently in my own context, specifically how my mentors form my own personal Board of Directors. My personal Board is intentionally constructed to include people of different backgrounds, industries, ages, genders and locations. In doing so, I am hoping to ensure that my Board can help identify my blindspots and fill in the gaps in my knowledge or experience.
At this point of my career, my stakeholders are quite simple: me, my family, those I work with, and my contemporaries. To the extent I build an enterprise or business, my stakeholders will grow to include employees, customers, suppliers, investors, the environment and the broader community in which the enterprise operates. As complexity grows, so do the potential blindspots and pitfalls.
Lesson #2: The role of a Board should shift and adapt to address evolving challenges and should always consider the outcomes for different stakeholders.
Bringing it all together
The story of We should not be told as the story about Adam and Masa and their wild anecdotes; they are but details in a more important narrative about governance. It is a cautionary tale about what happens when structures put in place to protect stakeholders don’t do their job.
The way the story is currently being told — as a story about two charismatic founders — continues to fetishize wealth and celebrity. If we do not push back on this narrative, we will likely end up following the next enigmatic figures into a mess that they may not ultimately have to clean up.
Governance is not a sexy topic, but it is one that we should all think about more often. In my opinion, incentives are the most powerful force in our day-to-day lives that we do not pay enough attention to. Governance is the mechanism by which we ensure that people do not act unchecked in pursuit of them. This is what I’veLearned.