Tuesday , November 19 2019
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Three Things I Think I Think – This Might Make You Mad

Summary:
Here are some things I think will make you mad to think about: 1) Did Adam Neumann deserve to make a billion dollars? I asked a controversial question on Twitter yesterday – did Adam Neumann, the recipient of a billion dollar payout from suffering WeWork, deserve to make a billion dollars while the company struggles? Some people were furious about this. I very much get the anger and I didn’t mean to make people mad. After all, I just want to make people happy by discussing reserve accounting and quantitative easing so inciting anger is totally against my philosophy and I sincerely apologize in advance for making heads explode all over the Internet. But this topic raises the interesting prospect of how we assess what is “excessive” executive pay. For instance, Neumann started WeWork from

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Here are some things I think will make you mad to think about:

1) Did Adam Neumann deserve to make a billion dollars? I asked a controversial question on Twitter yesterday – did Adam Neumann, the recipient of a billion dollar payout from suffering WeWork, deserve to make a billion dollars while the company struggles? Some people were furious about this. I very much get the anger and I didn’t mean to make people mad. After all, I just want to make people happy by discussing reserve accounting and quantitative easing so inciting anger is totally against my philosophy and I sincerely apologize in advance for making heads explode all over the Internet. But this topic raises the interesting prospect of how we assess what is “excessive” executive pay. For instance, Neumann started WeWork from nothing and took it from a $0 valuation all the way to a $45B valuation. Then he drove it back down to $8B. Along the way he has cashed in billions of dollars doing somewhat controversial stuff, but so far nothing deemed illegal. So, what do we make of this?

There’s elements of this that seem kinda scammy (Matt Levine has done the legwork on this if you’re interested). And there’s parts that are genuinely interesting. Actually, frustratingly simple. After all, WeWork is just a company that leases out cool office space. It’s not really a revolutionary concept so it’s both amazing and frustrating that someone could get fabulously wealthy doing something that seems like a pretty simple idea. But he did. And people paid up. Boy did they pay up. And some of the people who paid up were big boys. Very big boys. The biggest of the big boys.

The big boys are interesting in part because Softbank, the investment firm that is buying out Neumann, did the same thing to Travis Kalanick at Uber when he was undergoing some controversy in 2017. And the valuation of Uber is up about 15% since they did that. So Softbank has some experience investing money to make bad investments disappear. But still, this one seems like doubling down on a bad bet when the stock collapses and you have to buy out the owner just to clean up his mess. But still (again), Neumann has apparently done nothing illegal (at least as of now) and sold his shares to a perfectly willing big boy buyer at a value they deemed acceptable. So, he creates a lot of value, creates a big mess and sells that messy high(ish) value to a perfectly willing buyer. All good, right? Or not?

So, did he deserve it? Did Adam Neumann deserve a billion dollars if he created $45B that went to $8B that might go to $0? I think that’s the interesting question here because there are all sorts of situations where CEOs act like jerks/idiots and still get paid bigly.¹ Or, cases where founders drive up a valuation, sell to bagholders and take a vacation for the rest of their lives. Or, cases where worthless companies make billionaires out of people who sell to large firms who end up holding the bag. Or, executive pay packages that look okay in advance and end up detracting huge value from a firm. I think you get the point. This. Happens. All. The. Time. And most people don’t complain when the getting is good because it all looks good when the getting is good. But when the shit hits the fan everyone is like “OMG, I can’t believe that person made so much money running a bad company!” And I say that too. But part of me also wants to be like “Hello sir, can I introduce you to my old friend, Hindsight Bias….”²

It all kind of reminds me of a corporate case of people playing armchair General Manager of their favorite football team. For instance, when the #1 draft pick looks like a stud you pay him millions of dollars. You are buying his stock based on the expectation of higher future expected cash flows so you buy high. And then he turns out to be a big bust. And while the fan base was all about it during the draft they are the first ones to call the GM an idiot when the pick doesn’t pan out. The same basic thing happens with stocks and many CEOs. The founder works hard to build a company, they sell it along the way, sometimes people buy high and the founder gets rich while the late stage buyers hold the bag. As long as there’s no fraud this is all just part of the way this all works. Most of the time everyone gets pretty rich, but sometimes the firms fail and late stage buyers get screwed for buying high like dummies. So, I am mad at Neumann, mostly because he seems super shady, but part of me is also like, “Adam Neumann sat down at the big boy table and he played all those big dumb VC firms and investment banks for fools. Well played, sir.”³

Anyhow, it all makes me kinda mad. I’m sure it makes you mad. It made Twitter furious. So, if you need to let it out go be furious in the comments section and we can all be mad together.

That’s it. That’s actually all I’ve got for today. It’s only one thing. I know. One thing isn’t three things and three things are usually better than one thing. But I feel like it’s controversial enough to rile up three times the anger so there’s that.

NB – I want to be very clear about one thing – if Neumann broke the law running this firm then he should be held fully accountable. He might even deserve to go to jail. And it would be perfectly fine if every dime he made was clawed back. But innocent until proven guilty and all that. So, I guess we’ll see. In any case, I still think the subjective nature of CEO’s “deserving” certain pay is interesting, timely and worth discussing in more detail. It’s certainly worth more detail than the lazy sort of ex post facto treatment that it typically gets where we’re all like “oh, screw that guy getting paid when the firm fails”. This requires slightly more foresight and all if we’re going to try to resolve this issue.  

¹ – Is it bigly or big league? Has anyone figured out how to translate that man’s words yet? 

² – I don’t actually have an old friend named Hindsight Bias, but I kind of wish I did because he sounds like he might be pretty cool and extremely useful to have around when I consider opening my mouth about, well, most things. 

³ – It’s bigger than this, obviously. A lot of people are about to lose their jobs. But a lot of people also gained jobs. And while the down round looks bad for now, there’s still the potential that WeWork turns out to be a pretty successful company in the long-run. So there might actually be a lot of wealth to be made here and so maybe all those big dumb VC firms are actually very smart. I don’t know. I don’t know. I don’t know. That is, after all, why I am an indexing advocate!!  I don’t know.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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