The case of WeWork should be a wake up call to bankers and lenders the world over. We can learn a lot from the way the founder and his outsized ego ran the business.
Too often, we’re taken in by big personalities telling us how great their businesses are. We think that if we’re not lending to them someone else will get all the glory (and the revenue). So, to avoid missing out we overlook the obvious. We avoid the facts that don’t support what we want to do, which is to lend.
Briefly, in case you missed it, WeWork is (or was) a global business that provides work spaces, sometimes on a permanent basis, sometimes on temporary basis, to its customers. From its beginnings in 2010, the company was really the personification of its founder and CEO, a former Kibbutznik by the name of Adam Neumann. Revenue growth had been exponential. Even though the company made a loss of US$1,6bn in 2018, everyone wanted a piece of it. Especially the large banks.
In April 2019 the company announced that it had decided to go public with a listing on the US stock exchange. If successful, the IPO would have valued the company at US$47bn.
Six months later, the IPO never happened. The value of the business is basically zero and the founder and CEO has gone.
So, what happened?
The short answer is that the CEO happened. Neumann was, apparently, an incredibly difficult guy to be around – it was always his way or the highway. While that, in itself, isn’t the worst trait for a business leader to have, his ego and his greed probably were the keys to his ultimate failure.
The IPO was killed off only a week or so before it was due to happen. The way Neumann lived, often at the company’s direct expense was the reason. He flew a US$60 corporate jet, had a US$35m property in New York and two homes in the ultra-expensive Hamptons. It also turned out that he personally owned a number of properties that he rented to WeWork. They were the working spaces that were its core business. Outsiders thought that the company owned all the properties so they were shocked by the revelation.
So, in the end, the IPO was cancelled. The shareholders attempted to save what was left of the business. Believing that Neumann and his ego was the problem, they forced him out of the company that he founded.
What were the warning signs of the CEO’s ego becoming a problem?
There were three key warning signs;
- The existence of an outsized ego in a CEO is always a problem. The CEO’s inability to take counsel from others and the desire to be “king of the castle” means the relationship is never going to end well for a lender. The CEO will always feel that the bank needs him more than he needs the bank. He’ll feel that there will be lots of banks wanting him as a client because he’s just so special.
- People found it difficult to work with the CEO so the turnover of executives was rapid. That led to an unusual level of chaos in the organisation.
- The accumulation of vast personal wealth while the company needs cash flow is a bad sign. It really points to the CEO being in it for himself or herself and not for the long term benefit of stakeholders.
What should you do if you’re faced with business executives’ egos?
My advice would be to get as far away as possible but I know that’s not always possible. You’ll always feel major pressure to get a big deal done because the team will most likely be focused on the revenue that’s likely to flow to the bank. And, if you can finalise the deal, it will go a long away to achieving some of your own targets. So, it’s very easy to ignore the warning signs and close your eyes to the negatives.
But your role as a lender is to focus on the downside and to raise the issues with those responsible for the relationship with the client. Its hard to ignore the noise but, in the end, if you can’t get comfortable with the risk it’s better to be temporarily unpopular with your colleagues than to have a massive loss against your name. Do the thing that allows you to sleep at night!
To read the full story on what happened at WeWork, see The Sun Sets On We
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