Curse of the Cult of the Founder

Some things to know about Adam Neumann, the founder of WeWork: He once smoked pot in a private plane while crossing an international border. He banned meat from the WeWork corporate offices, then said the company would not reimburse employees for meals containing meat, then was seen eating meat himself. He once somberly addressed a recent round of layoffs at a staff gathering, which then became a tequila-infused dance party. Now, with WeWork’s initial public offering postponed and its valuation faltering, he is out of a job. Neumann is stepping down as chief executive officer of the unicorn, which subleases commercial real estate, while remaining nonexecutive chairman.

To We—as the business is, alas, formally known—this is a problem. For the past decade, the charismatic founder has built a fast-growing, revenue-swilling real-estate giant, making the case that it is really a technology and lifestyle company with limitless market potential. Under his leadership, it has opened more than 520 locations in dozens of countries, and its valuation soared to nearly $50 billion. In a recent regulatory filing, the company cited his departure as a significant risk factor:

But investors in WeWork—let’s call it WeWork—simply had to dump Neumann. He did not just engage in seemingly inappropriate behavior for a corporate executive, as chronicled by Eliot Brown in a recent Wall Street Journal feature. He also had a number of egregious conflicts of interest, mismanaged WeWork’s finances, and misplayed its public offering. The company might have to slash a third of its workforce, and its valuation has plummeted by more than half.

Call it the curse of the cult of the founder. Here in the Bay Area, brilliant, brash, cavalier founders upend established industries, gin up hundreds of billions of dollars of investment, and transform the way that people—rich people, at least—interact with the world. But brilliant, brash, cavalier founders may waste investors’ money, flout laws and regulations, and put their workers at risk.

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In tech, it is taken as a given that genius companies start with genius founder-CEOs: Mark Zuckerberg at Facebook, Elon Musk at Tesla, Travis Kalanick at Uber, Jeff Bezos at Amazon, Larry Ellison at Oracle, Bill Gates at Microsoft, Larry Page and Sergey Brin at Google, Reed Hastings at Netflix, Steve Jobs at Apple, and Michael Dell at Dell. Such founders tend to come with a singularity of vision, a disregard for entrenched business practices, and boundless creativity. They are disruptors, their businesses earthquakes that change how things are done.

Such disruption, obsession, and creativity often translate into real, outsize returns for investors, studies have found. Companies where the founder sticks around as CEO tend to be more innovative, as measured by patents held, and more valuable. They also tend to have higher stock-market returns, once traded on the public markets; indeed, numbers crunched by the consultancy Bain & Company show that businesses with founder-CEOs have three times the returns of businesses without them. Softer research by Bain suggests that corporate cultural factors—back to that obsession and creativity and penchant for disruption—explain a lot of the market-beating difference.

Or not. Proving the worth of founder-CEOs and measuring whether they are better for their companies is tricky business—dozens of confounding variables and selection biases are at play, as the relevant studies note. Companies led by their founders tend to be young companies. They tend to be technology companies. They tend to be venture-backed. All of those things might explain their performance, more so than their management structure.

And countervailing research shows that founders tend to make terrible managers, leading to worse business performance. One sweeping study demonstrated that companies led by founder-CEOs have lower management scores than firms with any other kind of leadership structure, such as being run by a private-equity firm, a family, or dispersed shareholders. They are not as good at monitoring what happens within the firm, or setting targets for “continuous improvement.” They are not as good at “promoting and rewarding employees based on performance.” As a result, they tend to have less of a “clear understanding” of their own weaknesses.

In Neumann’s case, both the pro-founder and anti-founder camps have plenty of evidence to support their point of view. The founder-CEO argued, convincingly, that WeWork was far more than a re-renter of office space: It was a company that could transform how people live, work, and play, and how urban spaces function. Investors bought into that argument and gave it billions; having expanded rapidly, WeWork brought in revenues of more than $1.5 billion in the first half of 2019. And yet. WeWork lost nearly $700 million in the first half of 2019, and Neumann seems to have created a number of bizarre, self-dealing business arrangements to funnel himself cash, perhaps in the range of half a billion dollars, according to some reports. (He at one point sold the rights to the corporate name “We” to WeWork, for instance.)

WeWork faces a daunting path to profitability, and may be better off without Neumann than with him. Still, after the company’s IPO, he will continue to “control a majority of our voting stock,” a legal filing reads. “As a result, Adam will continue to have the ability to control significant corporate activities, including the election and removal of our board of directors.” Neumann might not be a great founder-CEO. But the cult might stick around.