The WeWork mess and the popular delusions of crowds

The recent failure of the IPO for WeWork and the company’s subsequent problems can be traced to flaws in its corporate governance. There were insider dealings, such as Adam Neumann personally buying property that he leased to the company, and selling the ‘We’ trademark rights for $5.9 million to the company (before the funds were later returned). There were also governance problems inherent in the multi class stock structure that gave Neumann far more power than other stockholders, and board members who owed their position to him, effectively neutralizing any kind of check on his actions. But these flaws were not a secret. Something else contributed to the problem. 

That “something else” is the all-too-human ability to cast aside reason and not see what’s staring us in the face. We all suffer from it, as did pretty much everyone associated with WeWork in one way or another — investors, management, employees, the building owners that leased them space, and the general public eager to believe in the romance and excitement of a business that seemed to embody everything cool about urban, high-tech business.

Veteran real estate experts kept pointing to the inherent risk in WeWork’s business model mismatch — long-term liabilities in the form of leases offset by short-term rental agreements from tenants not necessarily known for their financial wherewithal. Others pointed to the company’s excessive spending and to ventures far afield from its core business. But everyone seemed happy to look away and ignore the WeWork reality. Better corporate governance most certainly would have improved the reality, but it might not have awakened WeWork dreamers.

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