We('re) Working on Corporate Governance: Stakeholder Vulnerability in Unicorn Companies

Abstract

Large private companies are often characterized by poor corporate governance that harms an array of stakeholders. WeWork provides a recent, high-profile example of such harms. The WeWork vision, and the dominating personality of its co-founder, Adam Neumann, attracted billions of investment dollars. As a private company with a valuation in excess of $1 billion, WeWork was a “unicorn.” In January 2019, WeWork was valued at $47 billion, and SoftBank alone had invested more than $9 billion.

In August 2019, however, a draft of the company’s Form S-1 registration statement was made public. Analysts and the financial press raised serious concerns. The filing revealed an aggressive multi-class voting structure, and an equally bold assessment of profitability reached through very creative accounting. WeWork scrambled to make changes, but the weaknesses proved too much. The IPO was cancelled; valuations were adjusted down to between $8 and $10 billion; SoftBank took control by injecting another $9.5 billion, approximately $1.7 billion of which was used to remove Neumann; and a new management team was installed, putatively to turn the company into a model of responsible corporate governance. Thousands of employees were laid off and collateral businesses were sold or shuttered.

Perhaps this story vindicates U.S. financial market regulation: the transparency required by federal securities law ultimately triumphed, and WeWork corrected course. But why did corporate and securities laws enable the WeWork “debacle” in the first place? Why were the substantial costs, both direct and collateral, to the WeWork stakeholders, not least its investors, not avoided?

Unicorns have absorbed hundreds of billions of investment dollars, but unfortunately have also generated massive externalities. When they have succeeded, unicorns have delivered enormous gains for their founders, insiders, and early-stage investors. When they have failed, these entities have imposed substantial hardships on investors and a wide array of stakeholders including employees, customers, suppliers, lenders, the economy, and society itself.

This article explores some of the reasons for the persistently poor governance of unicorns, with emphasis on the homogeneity of company boards and of decision-makers at the entities funding them. It looks at both securities and corporation law, and analyzes how such laws work (or mostly do not, but could, work) to protect investors and other stakeholders

This article argues that poor governance could be remedied by existing laws. It also proposes specific changes that might be made to rein in unicorns and protect stakeholders.