WeWork Fallout May Have Greater Financial Impact

Softbank is demanding better governance practices from companies seeking investment. Boards should be prepared for a domino effect.

Softbank’s decision to require higher governance standards at companies it invests in may advance the argument that good governance reduces financial risk. It should also inspire all boards to consider how their governance practices may be impacting financial risks.

Softbank Group suffered an $8.9 billion third-quarter loss, largely due to an estimated $10 billion bailout of office-sharing startup WeWork. Governance lapses at WeWork derailed its IPO this summer, leading to investor demands for governance reforms and the ouster of CEO and founder Adam Neumann.  The company, valued at $47 billion in January, was valued at less than $8 billion in October.

After analyzing the impact poor governance has had on WeWork, Softbank is expected to implement a series of changes designed to ensure better governance at companies it invests in, according to a Financial Times report. The proposed changes will limit dual-class share structures that give founders tremendous voting power over other shareholders and “Softbank will look to have at least one board seat, require at least one independent director, prohibit directors from owning supervoting shares and limit founders or management to less than half of the board seats,” the report said.

The spectacular governance failure at WeWork has intensified scrutiny on the recent crop of new companies with founders who insist on share structures that give them superior voting rights and additional perks. Softbank previously dealt with poor governance concerns at Uber Technologies, so the WeWork debacle has moved the company to make good governance a higher priority at its portfolio companies. While neither company is profitable, their valuations have improved since many of the governance changes that were flagged have been implemented.

It’s worth noting that other investors may begin to follow Softbank’s lead. Softbank’s proposed higher governance standards require that the founders of any new companies they invest in share more influence over the board of directors, accept less voting power and own fewer shares of the enterprise than companies have in the past. These adjustments lower the risk that directors of these companies will be manipulated into approving policies that lead to poor governance and the undue enrichment of the founders. Companies, like Softbank, that have venture funds will likely have their boards review policies regarding the governance practices of the pre-IPO companies they invest in.

Additionally, WeWork’s governance failures have highlighted the enormous financial risk companies take when they do not implement acceptable governance standards. Boards should consider that investors may use this situation to broaden the discussion of governance standards when entering into transactions with public companies. Investors and partners may examine the governance standards at specific companies for different reasons. For example, could the terms of a critical bridge loan change substantially based on examination of a company’s governance practices? It’s possible. Could a proposed merger be rejected based on a lack of governance around accounting controls? Absolutely. Could an activist investor threaten a company based on governance lapses? We’ve seen this happen before.

Corporate directors should take this opportunity to determine how their company’s governance practices may be placing the company at higher financial risk.