Governance sank WeWork from the start, says a VC and Stanford lecturer. Here's what any founder can learn from Adam Neumann's cautionary tale.

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• Rob Siegel, lecturer in management at the Stanford Graduate School of Business, and partner at XSeed Capital, details where WeWork went wrong.
• Specifically, the company lacked proper governance, which “everyone was willing to tolerate while the valuation kept rising.”
• You don’t have to break rules or norms to achieve massive growth, per Siegel. 
• Here’s what company leaders can learn from WeWork’s example. 
• Click here for more BI Prime stories.

WeWork has sparked many a conversation about the right way to build a business. In Rob Siegel’s entrepreneurial finance class at Stanford, students evaluate issues around governance, like the benefits and downsides to a leader’s power over an organization. 

To Siegel, the most important lesson from WeWork is that of proper governance, or the system that’s set up around how the business itself is controlled. This is complicated by the fact that there’s no formal legal definition of what startup actually means, and, corporate law does not yet have rules on the books about how they ought to be governed. 

“WeWork doesn’t appear to be fraud, it just appears to be horrific governance that everyone was willing to tolerate while the valuation kept rising,” Siegel tells Business Insider. 

WeWork’s design and branding was unique, which allowed it to stand out among other companies that have operated in the shared office space for a long time, like Regus, which also offers office space. WeWork did a good job of hiring the right people, and touted a culture where people hustled hard, then partied harder.

Is it possible to extricate the culture that was a byproduct of that governance from the growth that defined the company? In short, the answer is yes: “I do not believe and nor have I seen that great companies need to have horrifically toxic cultures,” Siegal says.

Disproportionate growth could go hand-in-hand with proper governance 

There are plenty of examples of well-run companies that were able to achieve growth with good governance. Siegel doesn’t buy into the belief that the only way to achieve disproportionate growth is by breaking rules and breaking the law.

“It happens sometimes and by the way, when there’s great amounts of money to be pocketed, it creates potentially horrific incentives for people to cut corners,” Siegel cautions. “But that doesn’t have to be that way. In the end, leaders decide how they want to lead and what companies they want to build.”

In order to be a great company in a crowded playing field, leaders have to make sure they practice good governance. 
This extends beyond growth in valuation: Leaders should also consider how they’ll be perceived by other companies, potential hires, and their customer base. 

For example, as University of Michigan professor characterizes it, WeWork serves as a cautionary tale against full executive control, such as the kind that former WeWork CEO Adam Neumann enjoyed  — and before him Elizabeth Holmes of Theranos and Travis Kalanick of Uber. 

Why WeWork got away with it

The reason WeWork got away with poor governance was because it was built on a transformational idea. Companies found value in flexible business spaces that they could rent without signing long-term leases.

“The bottom line is, when you have things that are transformational, there’s a hype cycle that goes with that,” Siegel explains. “And sometimes evaluations run ahead of the actual optics and then as gravity comes back, some companies will make a transformation and some companies won’t.”

WeWork was a transformative company, but it lacked defensibility, meaning its business model could be easily copied. Its message was appealing, but there was a low bar to entry for the field. WeWork’s competitors could, and did, catch up.

“If you go to a Regus, it’s more conservative, maybe a little older,” Siegel said. “They’ve got this brand Spaces. I was in a Spaces in Sao Paulo last month, and it felt very much like a WeWork vibe.”

So companies have already begun to replicate what made WeWork unique, while having proper governance in place. The question now is where WeWork can differentiate itself. 

“It’s not that hard to recreate what WeWork has done,” Siegel said. “What WeWork has done is the branding, the vibe, the people they hire. But there’s nothing that prevents other companies from doing the exact same thing.”

SEE ALSO: A top professor is already teaching WeWork in his venture-capital class. Here are 5 lessons that investors need to know.

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