Adam Neumann's eye-popping deal with SoftBank to exit WeWork is being described by corporate governance experts as a prime example of the issues with dual-class shares, where founders or early investors receive "high-voting shares" with voting rights disproportionate to their economic interest.
The news of Neumann's package, which would let him walk away with as much as US$1.2 billion (NZ$1.9 billion), as well as a loan to repay a credit line, comes amid increasing pushback from investors as start-up unicorns such as Lyft, Pinterest and Peloton continue to go public with such arrangements.
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Mark Zuckerberg famously holds nearly 60 per cent of the voting power at Facebook with his super-voting shares. At Snap, the common shares offered as part of its IPO had no voting rights at all; its 2018 annual report said its co-founders controlled 97 per cent of the voting power. Neumann's shares at one point granted him 20 votes per share; that figure dropped to 10 votes per share before he stepped down as CEO.
The exit package is largely about control, said corporate governance experts. The buyout offer and hefty consulting fee from SoftBank, WeWork's largest outside investor, likely helped to loosen Neumann's iron grip. The leasing start-up has seen its valuation implode, scrapped its ill-fated initial public offering and is preparing to layoff at least a couple thousand employees, according to reports.
"Adam Neumann will essentially get a king's ransom for grossly mismanaging the company on his way out," said Amy Borrus, deputy director of the Council of Institutional Investors. "This is a cautionary tale about the dangers of the dual-class share structure."
The package includes the ability for Neumannto sell up to US$970 million of his shares as part of a tender offer and receive a US$185 million consulting fee over four years. He will also get access to a US$500 million loan to repay a credit line, said a source familiar with the package granted anonymity to speak about the terms of the deal.
Companies that have multi-class share arrangements argue they protect long-term strategies and insulate founders from early meddling by activist investors. But shareholders say founders who hold these high-voting shares can control the outcome of any investor vote, and decide who gets on the board. Investors who want to oust a founder would have a hard time unless they bought out his or her stock, lowering their voting power.
Last year, the Council of Institutional Investors, which primarily represents investors such as state and local pension funds, foundations and endowments, petitioned the New York Stock Exchange and Nasdaq to automatically convert listed companies to a one-share, one-vote structure no more than seven years following the IPO. This summer, it also began calling out directors who were on boards of companies at the time of an IPO that had unequal voting rights and no "sunset provision" on the multi-class structure.
Such share arrangements also give CEOs much more power when it comes to negotiating their exits, said Charles Elson, the executive director of a corporate governance centre at the University of Delaware. In a typical CEO departure, you're "negotiating with someone who has a few cards," he said. "This is a time where you're negotiating with someone who holds the whole deck."
Elson noted that Neumann's ability to sell US$970 million of stock in the tender offer is more of a buyout than a payout. "They're buying his stock - that's what they're doing. They're buying out his interest."
The US$185 million consulting fee, which will be paid out over four years and includes a non-compete agreement, raised eyebrows from Elson and other governance experts. "It's one of the most significant severance packages I'm aware of," he said.
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SoftBank declined to comment about criticism over the size of the package. In a news release, it said Neumann will become a "board observer," that the size of the board will be expanded, and the board will receive voting control over Neumann's shares. WeWork declined to comment.
Laurie Hays, a spokeswoman for Neumann, said in a statement that Neumann "will recognize the same value for his shares as every other employee and investor tendering into the SoftBank US$3 billion offer. He will use a portion of his potential proceeds to pay down debt, some of which was incurred on behalf of the company. WeWork is a company with close to US$4 billion in revenue that without Adam would not exist."
She said that Neumann has not decided how much stock he will sell and that a condition of the loan is that it will be repaid with proceeds from any stock sales, noting he has drawn down US$395 million from the credit line. Regarding the consulting fee, she said, "that is the price the board decided was worth Adam staying close and not starting a competing business" and noted the board voted on management decisions.
WeWork is a private company, but Neumann's "consulting fee" blasts past the value of most severance payments bestowed on public company CEOs. An analysis of all change-in-control payments made to CEOs between 2005 and 2015 by the research firm Equilar found that the highest potential payment amid a merger was to former Gillette CEO James Kilts, at US$165 million.
Meanwhile, at US$185 million - or US$46 million a year - Neumann's fee would be nearly four times the median S&P 500 CEO's annual full-time compensation of US$12 million in 2018. In addition, consulting or advisory fees paid to departing CEOs of public companies are typically a fraction of the one being paid to Neumann, Equilar data showed.
Nell Minow, vice chairman of the governance consulting firm ValueEdge Advisers, said SoftBank was likely to face questions from investors about the deal with Neumann, and "they deserve answers," she said. "That will be a very tense conversation, I think."
Rosanna Landis Weaver, an executive compensation expert for the nonprofit As You Sow, said her questions weren't just about the new deal, but about how such outsized voting rights were originally granted.
"No board should agree to 20-to-1 voting rights. No investor should invest in something where someone has that much control," she said. It's an illustration, she said, of "why you want to have good corporate governance - so you're not painted into a corner."
