Don Langevoort and Hillary Sale are two of my favorite people and corporate law scholars. they've published a very interesting new paper, which uses WeWork as a case study in how corporate governance works (or, more precisely. does not work) in the startup setting:
This article explores a series of rent-seeking behaviors and fiduciary deficits that are playing a role in the “growth” and demise of U.S. companies. Start-up financing occurs through exemptions that remove disclosure obligations required in public markets, assuming that private ordering suffices. The exemptive-privilege premise is that parties to financing rounds will be faithful agents, i.e., fiduciaries, to their sources of capital. Where there are conflicts of interest, fiduciary deficits will arise unless either the threat of litigation for breaches of duty sufficiently deters the resulting opportunism or the sources of capital are themselves sufficiently watchful and savvy to combat the opportunism. As private capital sources become more numerous and diverse, the latter may not happen so reliably.
We examine this territory through a business-school like case study of WeWork, one of the most recent examples of failed private ordering and one where the prescribed corporate governance mechanisms failed to fill the gaps. WeWork’s extraordinary growth over eight rounds of financing both strengthened the hand of its CEO, Adam Neumann and concealed danger signs. Indeed, in the absence of required disclosure, fiduciary duties take on extra significance. Yet, the WeWork board exhibited multiple fiduciary deficits resulting in what is a cautionary story about governance failure and a warning to those who are focused on expanding “access” to these funding rounds
In short, the funding and governance systems are not designed for long-term “startup” governance, and WeWork reveals the systemic slack and flaws. Our exploration of the motivations, incentives and opportunities in start-up financing reveals an accumulating set of deficits that makes the current state of affairs more problematic than the conventional account would suggest. From founder control enabling self-centered, biased and risky behaviors, to funders with diverse incentives and capital sources, to start-up market “valuations” issues, the result is failed information-forcing systems and governance safeguards and directors who focus on constituent protections and not on their fiduciary duties.
Langevoort, Donald C. and Sale, Hillary A., Corporate Adolescence: Why Did 'We' not Work? (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3762718 or http://dx.doi.org/10.2139/ssrn.3762718
