19 ms·

There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct le

There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies? It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.

huffmsa 8y ago
We're seeing it with Sears too. Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.
- drieddust 8y ago
  Shouldn't that be a case of corruption straight up? Seems like entire system is in cahoot.
  - huffmsa 8y ago
    There's no clear motive. I guess he's keeping the company alive long enough to sell off more of it's assets, but it seems like a relatively low yield operation to me. Perhaps he's operating on a level we can't comprehend
    - howard941 8y ago
      Strip the assets beyond the bankruptcy code's 2 year fraudulent conveyance lookback period. Fix the problem by extending it to 10 years for corporate fiduciaries or something.
    - AngryData 8y ago
      There is a pretty clear motive to me, tons and tons of prime real estate in the heart of pretty much every community that has more than ten thousand residents.
- jhall1468 8y ago
  That is not what happened. The Chairman was buying Sears out of bankruptcy using his fund. He didn't approve it, an independent law firm did (they rejected his first bid), and it still has to be approved by a bankruptcy judge, which isn't a foregone conclusions, since Sear's unsecured creditors are going to fight it.
  - bduerst 8y ago
    I think their point isn't about the recent bankruptcy, but that he bought out controlling shares of Sears, sold himself the retail property of Sears and KMart, and then started charging rent to the public company.
    - jhall1468 8y ago
      Right, and he didn't approve any of those real estate deals. They weren't sweetheart deals.
      - wavefunction 8y ago
        Personally you could never convince me that this sort of Sears situation wasn't engineered by people following exacting legal advice.
        scott_s 8y ago
        For more on that: https://prospect.org/article/how-sears-was-gutted-its-own-ceo https://prospect.org/article/how-sears-was-gutted-its-own-ce...
        unwabuisi 8y ago
        Thank you for this link
gregoriol 8y ago
Not only today, not only Silicon Valley, not only startups Check Carlos Ghosn's ongoing story for example
- MandieD 8y ago
  Main difference being that Ghosn is currently sitting in a jail cell in Japan, awaiting trial...
- unreal37 8y ago
  Ghosn was believed to be a God in the car business. In France, he still is. Dangerous thing to be told you're a God.
pjc50 8y ago
Not just in silicon valley by a long way. MG Rover: https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-prosecute-mg-rovers-phoenix-four/administration/ https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-... BHS: https://www.theguardian.com/business/2018/mar/27/philip-green-escapes-company-director-ban-for-bhs-1-deal https://www.theguardian.com/business/2018/mar/27/philip-gree... / https://www.theguardian.com/business/2017/feb/28/philip-green-agrees-pay-363m-bhs-pension-fund https://www.theguardian.com/business/2017/feb/28/philip-gree... Maplin: https://www.taxresearch.org.uk/Blog/2018/02/28/40831/ https://www.taxresearch.org.uk/Blog/2018/02/28/40831/ (fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not? Surely you take as much money from the investors as you can and pocket exactly as much as you can get away with without being prosecuted? Anything less would be economically inefficient! /s)
- humanrebar 8y ago
  It's worth noting that luminary capitalists like Adam Smith were very much concerned with privately enabled rent seekers in addition to government enabled ones. There's nothing inherently capitalist about corruption. It's a property of power, not capitalism.
  - coldtea 8y ago
    >There's nothing inherently capitalist about corruption. It's a property of power, not capitalism. That's the same argument that says "USSR/DDR/Cambodia/NK/etc was no real communism". We might excuse a few diversions from a political/economic system, but after some point, like with anything else, capitalism is what capitalism does time and again.
    - maratd 8y ago
      Not sure this makes sense to me? There's corruption in every system, regardless of the ideology behind it. Are you saying there's no corruption in communism? Because I have news for you, if you do. It seems like corruption is simply endemic to the human condition. It has nothing to do with capitalism/communism/etc. Whatever the system happens to be, we will find a way to corrupt it.
kimjongmin 8y ago
Also McDonald's https://www.imdb.com/title/tt4276820/ https://www.imdb.com/title/tt4276820/
geofft 8y ago
Reminds me of Galt's Gulch, where all the good guys name companies after themselves, and all the bad guys name themselves something generic like "Associated Steel".
- eggy 8y ago
  At least you know who is putting their skin in the game rather than some generic name. Also Tesla is not named Musk, or Amazon, Bezos.
  - geofft 8y ago
    Why are they putting their skin in the game? What sort of decisions could WeWork, Tesla, or Amazon make that would ruin the personal finances of Neumann, Musk, or Bezos? There is still a corporate abstraction, so while profits turn into bonuses, losses don't turn into personal misfortune for the founders. (Although they may turn into personal misfortune for laid-off employees.) (And yes, the real world is not a fictional caricature.)
    - rdl 8y ago
      Musk has said and shown repeatedly that he'd put his last dollar into SpaceX (and probably Tesla), so he's not a great example here.
      - richardknop 8y ago
        Not sure about that. He maintains very luxurious lifestyle. His continuous investment in Tesla could be seen more as an effort to maintain full / majority shareholder control of the company. I don’t think he would sell his house and invest the money in Tesla. He would still be rich even if Tesla goes bankrupt. Plus he has billionaire family members as a fallback.
        gowld 8y ago
        Who are Musk's billionaire family members?
datainplace 8y ago
I think its a clear conflict and shareholders should protest, but this happens at every level of the economy. I used to work buying small businesses. Its common for business owners to also own the building in a separate LLC. And its great to hear them complain about how they always get paid last, when they have been paid every month through rent.
cm2187 8y ago
But is Neumann is the sole shareholder? Musk certainly is not Tesla's sole shareholder. If Musk pays himself through some juicy Tesla contract, he is fleecing other shareholders.
- modoc 8y ago
  Only if the contract terms are worse for Tesla than another equal quality option in the market.
  - cm2187 8y ago
    Right, but even then it raises a conflict of interest, and probably shouldn't be handled by the CEO directly.
- gowld 8y ago
  No, he is not. He is the controlling shareholder.
austincheney 8y ago
It is a product of personality. It takes a certain amount of risk aversion to risk everything to start a company, but that isn't what this is about. This is about investment and it takes selling yourself to convince people to give you money. A good sociopath lives for convincing people to give them what they want without reasonable limits. Fortunately, most people are not sociopaths, but unfortunately most of these people will not achieve the successes you described.
- Slartie 8y ago
  Maybe they would, if the sociopaths wouldn't assimilate many of those "successes". I consider a certain number of successful businesses to be a relatively stable statistical certainty in a society which provides the necessary environment for them (stable legislation, infrastructure, workers, a market to sell stuff etc.). The sociopaths now don't increase the total number of these successes, but they tilt the distribution of successes towards themselves as a group, thereby making non-sociopaths less likely to achieve a success.
captainbland 8y ago
Well I mean that's the consequence of capital ownership isn't it? It's not like these people are operating under some kind of constitutional obligation to their staff or anything.
- praptak 8y ago
  They are screwing (the other) shareholders.
  - captainbland 8y ago
    Well sure, but chances are you're enriching the majority shareholder in this case. It's a per-share system not a per-person system.
    - byset 8y ago
      What's your point? He is still violating his fiduciary duty to the corporation by looting it to enrich himself personally.
coldtea 8y ago
>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. I'd rather this was the case completely -- privately owned, extensions-of-oneself companies and we had no BS like boards and stockholders...
ataturk 8y ago
Not enough emphasis on ethics being taught in business schools these days.
Spooky23 8y ago
It’s funny when companies do things that harm the public directly or indirectly, we get high minded passionate economists or whomever telling us how companies have a sacred duty to maximize shareholder value, blah blah blah. When you see countless companies get looted and crushed by private equity takeovers, to the point that middle schoolers can predict with accuracy when a company will vaporize, you get analysts with nonsensical stories about turnarounds, etc. But when self-dealing management use the company to enrich themselves in a way that is at best ethically questionable, you don’t hear too much.
- scarface74 8y ago
  If it isn’t harming the public directly or indirectly, why should we care? If a bunch of VCs want to enrich WeWork’s CEO, why should I care? Once mutual funds and pension funds start investing in WeWork, then I’ll care.
  - Spooky23 8y ago
    Incubating a culture of corruption has some obvious negative impacts. There's also a variety of complications, from pension funds that do invest in VC funds, to national security implications of foreign principals funneling investments to individuals. You also have disruptive market behavior if we allow the boys with access to VC capital the ability to do whatever, while publicly traded real estate trusts need to meet regulatory requirements that prohibit that type of activity.
  - maxxxxx 8y ago
    "Once mutual funds and pension funds start investing in WeWork, then I’ll care." there is a good chance that pension funds have already invested in WeWork, directly or indirectly. Where do you think the money is coming from? The VCs aren't putting in their own money.
  - moorhosj 8y ago
    Pensions funds currently invest in venture capital funds. They also invest in REITs which are directly impacted by WeWork's business model.
SilasX 8y ago
Sorry for the naivete, but isn't that a solved problem in corporate governance, with standard procedures for making sure that company A isn't just a sockpuppet for shoveling money into company B?
- howard941 8y ago
  You shouldn't apologize, because it was a mostly solved problem and times changed. Search "corporate opportunity doctrine". It became unsolved in the last 30-40 years.
- scarface74 8y ago
  Corporate Governance doesn’t help when either the board is just a rubber stamp for the CEO or the CEO still holds a controlling stake in the company. And in the case of successful founders, even without a controlling stake, just their reputation makes it harder to go against the CEO. Could anyone on the board have challenged Gates or Steve Jobs 2.0? In the modern era, who would challenge a decision by Bezos or Hastings?
  - achillesheels 8y ago
    Is that necessarily a bad thing? If Gates or Jobs acted unwantonly despotic, then the checks and balances are in place for their removal. Sometimes, reputations speak for themselves and must be respected as a function of following a leader.
    - scarface74 8y ago
      No it's not. I don't think anyone but Jobs could have made the deal with Microsoft that help save Apple[1]. Just like only Nixon could go to China. Could any other CEO besides Hastings transitioned Netflix from a DVD business to a streaming media business, and on top of that spend millions of dollars developing a set top box and then decide at the last minute it wasn't in their strategic interest to sell it and spin it off (Roku). The same could be said about Bezos and Amazon. [1] No the money MS "gave" Apple didn't save them. Continued software support with Office and IE helped a lot.
partingshots 8y ago
What does Shkreli have to do with Silicon Valley?
e40 8y ago
Yeah, this is not just in SV. Conflict of interest seems to be one of those things, in the last 20 years or more, that people do not give a shit about. I've seen it in a lot of places, and when I have conversations about it with smart friends, I don't get a rise out of anyone. I can only imagine what the average, working-class Joe/Jill think. If I had a conversation with them, they'd probably think I was some kind of nut. To me, this smells like American culture just being corrupt. EDIT: typo
- luckydata 8y ago
  It's been sold in the media for years, if you're successful then everything is permissible because "job creators". If you constantly glorify crime, that's how you get more criminals.
- philwelch 8y ago
  The fish rots from the head, and there's a pretty big precedent at the head of the US government in terms of conflict of interest. It's also worth noting that the US maybe 20 years ago was somewhat exceptional when it comes to conflicts of interest. In other cultures, personal relationships and personal vested interests that we would consider "corrupt" are a load-bearing part of the social structure. So perhaps we're reverting more to the global mean on this point.
mac01021 8y ago
Among the ambitious and entrepreneurial, this sort of behavior is nothing new. In his autobiography, Benjamin Franklin relates how he found himself as a government official for the colony of Pennsylvania and then proceeded to hire his own printing shop whenever his office needed to publish a widely circulated document or pamphlet. BTW, that autobiography is a great read. you can find it for free on Project Gutenberg: http://www.gutenberg.org/files/20203/20203-h/20203-h.htm http://www.gutenberg.org/files/20203/20203-h/20203-h.htm
- gm3dmo 8y ago
  If he lived in 2019 he would have just dropped it on an S3 bucket. What with your government being all like shut down and all.
- nsajko 8y ago
  I think the perception has changed a great deal since then. Note that the USA government hired on a spoils-based system until 1883: https://en.wikipedia.org/wiki/Spoils_system https://en.wikipedia.org/wiki/Spoils_system It would be brilliant to see an analysis of how commonplace this and other types of corruption were historically and geographically.
manishsharan 8y ago
Didn't the CEO of Sears own a hedgefund that became landlord of all Sears retail space ? My point is it is just not Silicon Valley.
- Junk_Collector 8y ago
  Yes, he sold property that Sears owns to companies he controls to fund stock buybacks from himself (and his companies), becoming Sears' landlord in the process.
Yuval_Halevi 8y ago
>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. 100% with you here. When companies grows so much ego becomes part of the game.
arminiusreturns 8y ago
This happens even on the small scale. My SO was an exceptionally good paralegal at a law firm that was imploding due to issues like this, so after encouraging her, she convinced her boss to leave the firm and they started their own. It started doing well very quickly, and suddenly the lawyer she was working for became the very thing he hated in the first place. Doing stuff like spending 10-15k a month on the firms American express on hunting trips, spending so much time hunting he's in the office half the year, pulling multiple 5k "disbursements" a month for himself (on top of salary), to the tune of nearly 40k a month in personal expenses, and then for a few months had to take out a loan to meet payroll! Thankfully she sees the writing on the wall and is about to get her CPA and bounce, and I'm going to laugh when it all collapses around him because she's basically running the firm, but lawyers have a racket so you can't do profit sharing with the non lawyer plebs (by law) like paralegals so she gets a fraction of the pay to do most of the work while he lives the high life, which is exactly what imploded the old firm!
- gaadd33 8y ago
  How does the law prohibit a profit sharing plan at law firms? It's illegal to pay non lawyers bonuses?
  - meddlepal 8y ago
    https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_4_professional_independence_of_a_lawyer/ https://www.americanbar.org/groups/professional_responsibili... It's a bit more nuanced.
    - SilasX 8y ago
      I see an exemption for "compensation", which I assume means "You can't pay out profits to non-managing non-lawyer silent partners, but you can do it for any non-laywer worker as part of their compensation arrangement." >(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and
dunpeal 8y ago
> Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty. Less relevant in WeWork's case, but very relevant in Tesla's case, since it's a public company, and in fact Tesla and Musk have been sued for neglecting their duties before: https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo-musk-accused-in-lawsuit-of-defrauding-shareholders-idUSL1N1V120W https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo...
- magduf 8y ago
  >The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty. Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. It's like investing in Sears under Eddie Lampert; you have to be a moron to put your money into Sears stock when it's obvious the guy is solely working to drain as much money out of Sears and into his own bank account as possible. And a lawsuit, even if you win, isn't going to net you much money.
  - dunpeal 8y ago
    > Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. So you are saying the investors (who are the current shareholders) stupidly bought into Neumann personality cult. So now they are paying for their idiocy. This isn't some failure of capitalism: it's the failure of large, wealthy, sophisticated investors to properly assess their own investment.
    - magduf 8y ago
      Exactly, yes. It's the investors' job to research their investments, and company stock investments have no guarantees (unlike a CD or savings bond, for instance). Personality cult companies can actually be good investments; it just depends on the personality. Investing in Apple while Jobs was running it before he died was generally a very good and profitable investment, for instance. This company doesn't appear to be that way, and I'm saying that as someone who hasn't researched it, I'm just going on what a few negative news articles I've seen about them and their leader. The signs appear to all be there that this company is not a good long-term investment like Apple or Oracle (another company basically run by one guy), it's more like investing in Theranos.
conanbatt 8y ago
The person screwed in this transaction is the investor. They should sue.
- rchaud 8y ago
  But the investor (Softbank) is the one that bestowed its $47 billion valuation on the company. There are a few billion reasons why he wouldn't sue.
nwah1 8y ago
Actually, Shkreli got in trouble even though all of the plaintiffs had ultimately profited big time... but with some delay and period of uncertainty. Which shows that outcome is not all that matters, legally.
cma 8y ago
>Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies? Don't forget Michael B. Rothenberg: >The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.
drb91 8y ago
The risk to the CEO here is pretty small.
Gys 8y ago
> people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests I think it goes beyond that, by people viewing whole states as such extension
sonnyblarney 8y ago
Shkreli was trying to to good, and it was a personal issue, and it was kind of the right thing to do.
- FireBeyond 8y ago
  Let's not look at Shkreli like that. He's a guy who opposed FDA approval of a drug. Not based on its effectiveness, or medical benefit, but because it would interfere with his profits from a competing, inferior drug. This is not someone who has a strong history of "the right thing to do".
stcredzero 8y ago
Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! A CEO being the landlord strikes me as a big potential conflict of interest. For example, if the company needs to move to a larger space to grow, the CEO might want to delay to avoid losing income. Perhaps the company might have a prospective buyer who'd want to relocate everyone to their campus. In that case, there would be an external incentive for the CEO not to make the deal. Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? The way this used to work, is that the employee would become aware of a market need because the current company had that need and would be a great customer, so the employee spins out her own business, then leaves to run it.
- unreal37 8y ago
  Some people say that McDonald's Corp is not a restaurant, but a real estate company. They get other people to own and run the restaurants, but they buy and lease the land to them at a profit. So how is this different than WeWork's CEO owning the building and leasing it to WeWork? He's essentially acting like Ray Kroc.
  - telotortium 8y ago
    In that case, McDonald's still owns the real estate, not Ray Kroc. Here the interests of the corporation and Ray Kroc (as shareholder of McDonald's) are aligned - McDonald's has no incentive to overpay for the real estate, because that would reduce its profits.
  - CalChris 8y ago
    Did Ray Kroc personally buy real estate and then lease it to McDonalds to sublease it to franchisees? Was he on both sides of the transactions, leasor as owner of the property and leasee as CEO of the company signing the first lease?
  - l33tbro 8y ago
    McDonald's are basically profit engineers. There franchisee terms here is Aus: • 20 year minimum lock-in for franchisee. • A monthly service/royalty fee based on a percentage of the restaurant’s gross sales (currently 5%). • A monthly rental being a fixed base rent and a percentage of the restaurant’s gross sales • A monthly advertising contribution of not less than 4% of gross sales. • All Outgoings including rates and utilities. Also a metric butt-tonne of start-up costs.
paulddraper 8y ago
> It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Isn't business defined as enrichment of the shareholders? So (depending on who owns the shares) it really shouldn't be amazing, right?
uberman 8y ago
This type of behavior is nothing new. Years ago, I worked as a developer at a very large silicon valley based company. Everyone here would recognize their name. It was common knowledge that the "corporate art" on the walls of the buildings was owned by various members of the "C-Suite" and leased back to the company. Don't even get me started on the private loans given to members of the C-Suite and Board then subsequently "forgiven". I used to rage about it every time they published their financials.
njarboe 8y ago
Some investors have decided that the best returns come from companies that have CEO's/leaders that run them like sole proprietorships. This works best when the CEO is actually the founder of the company. Investors with this philosophy would like to have that person have majority ownership of the company, but this rarely (never?) financially possible. Some companies have stock step ups that let the founder(s) keep voting control even though they don't have the majority of the stock. Google, Facebook, and Snap are some companies like this. Other very successful companies that have/had a single person that basically runs the whole place as their own company are Berkshire Hathaway, Apple, Oracle, Microsoft, Amazon. The top five American companies by market cap are of this type. I would not say the this is such a bad thing as these people are looking out for the companies long term future. Compare HP before and after the founders left. Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. If society needs these huge corporations (maybe we would better of with out them?), I would much rather they be run by a single human than be a soulless bureaucracy with a figurehead at the top. If Neumann fully owned WeWork, it would not be corrupt self enrichment to own the properties, just vertical integration. If the investors want them to work this way, is it really corrupt? I wouldn't think so.
- magduf 8y ago
  >Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. I'm not a big fan of HP, and I especially abhor the inkjet printer business, but I'd like to point out there's more to HP (and even their printers) than this. Their business printers are still pretty good AFAICT. My simple rule when contemplating a printer purchase: "do not ever, ever, ever buy an inkjet printer".
deepGem 8y ago
I couldn't read the full article since I am not a WSJ subscriber, so forgive the naivete, but what inherently is wrong in Neumann leasing a building that he owns ? I mean, he could have rented that building to someone else, instead he is leasing it out to WeWork. How did get get the money to buy that building - if he is siphoning money from WeWork revenues and using that, that's illegal I suppose. If he used Wework stock options as collateral to finance the building, that could be some grey area I guess.
- zopa 8y ago
  Is WeWork paying market rent to Neumann, or is it paying more? Did Neumann negotiate vigorously with Neumann for the best possible rate? With real estate, how could you tell? CEOs have a fiduciary responsibility to the other stakeholders of their companies. That's the problem here.
- Aloha 8y ago
  I agree with you, not only that, this kind of thing often happens with privately held companies.
sdfoisd98 8y ago
This isn't just a silicon valley archetype. It's a cultural archetype. Ownership is the religion we're indoctrinated with. To paraphrase James Madison, the Senate ought to protect the minority of wealthy owners from the majority. Deference to wealth and ownership is in the DNA of the country. America is a tacit caste system, heavily indoctrinated to believe it's a freer place than it is. While there's a stronger guarantee of freedom of speech/expression than other countries, who owns our time/effort is rarely ever discussed and the realities of it questioned. The owners do, of course, and direct it to their desires.
jonhohle 8y ago
In the Phoenix metro area we have BASIS schools that use a similar tactic… with public education funds. The school and foundation are non-profit, but they use a for-profit management company that's owned by the founders of the schools. No transparency is required for the private business which provides teachers(!) and other back-office services. Of course, the founder is living meagerly like most educators (including the ones he employs or the one's he's taking funding away from)… wait, no, he's raking in the cash. That said, BASIS provides an excellent environment for students that are compatible with its education model (read: students who would have been successful anywhere).

huffmsa 8y ago

We're seeing it with Sears too. Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.

drieddust 8y ago
Shouldn't that be a case of corruption straight up? Seems like entire system is in cahoot.
- huffmsa 8y ago
  There's no clear motive. I guess he's keeping the company alive long enough to sell off more of it's assets, but it seems like a relatively low yield operation to me. Perhaps he's operating on a level we can't comprehend
  - howard941 8y ago
    Strip the assets beyond the bankruptcy code's 2 year fraudulent conveyance lookback period. Fix the problem by extending it to 10 years for corporate fiduciaries or something.
  - AngryData 8y ago
    There is a pretty clear motive to me, tons and tons of prime real estate in the heart of pretty much every community that has more than ten thousand residents.
jhall1468 8y ago
That is not what happened. The Chairman was buying Sears out of bankruptcy using his fund. He didn't approve it, an independent law firm did (they rejected his first bid), and it still has to be approved by a bankruptcy judge, which isn't a foregone conclusions, since Sear's unsecured creditors are going to fight it.
- bduerst 8y ago
  I think their point isn't about the recent bankruptcy, but that he bought out controlling shares of Sears, sold himself the retail property of Sears and KMart, and then started charging rent to the public company.
  - jhall1468 8y ago
    Right, and he didn't approve any of those real estate deals. They weren't sweetheart deals.
    - wavefunction 8y ago
      Personally you could never convince me that this sort of Sears situation wasn't engineered by people following exacting legal advice.
      - scott_s 8y ago
        For more on that: https://prospect.org/article/how-sears-was-gutted-its-own-ceo https://prospect.org/article/how-sears-was-gutted-its-own-ce...
        unwabuisi 8y ago
        Thank you for this link

gregoriol 8y ago

Not only today, not only Silicon Valley, not only startups Check Carlos Ghosn's ongoing story for example

MandieD 8y ago
Main difference being that Ghosn is currently sitting in a jail cell in Japan, awaiting trial...
unreal37 8y ago
Ghosn was believed to be a God in the car business. In France, he still is. Dangerous thing to be told you're a God.

pjc50 8y ago

Not just in silicon valley by a long way. MG Rover: https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-prosecute-mg-rovers-phoenix-four/administration/ https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-... BHS: https://www.theguardian.com/business/2018/mar/27/philip-green-escapes-company-director-ban-for-bhs-1-deal https://www.theguardian.com/business/2018/mar/27/philip-gree... / https://www.theguardian.com/business/2017/feb/28/philip-green-agrees-pay-363m-bhs-pension-fund https://www.theguardian.com/business/2017/feb/28/philip-gree... Maplin: https://www.taxresearch.org.uk/Blog/2018/02/28/40831/ https://www.taxresearch.org.uk/Blog/2018/02/28/40831/ (fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not? Surely you take as much money from the investors as you can and pocket exactly as much as you can get away with without being prosecuted? Anything less would be economically inefficient! /s)

humanrebar 8y ago
It's worth noting that luminary capitalists like Adam Smith were very much concerned with privately enabled rent seekers in addition to government enabled ones. There's nothing inherently capitalist about corruption. It's a property of power, not capitalism.
- coldtea 8y ago
  >There's nothing inherently capitalist about corruption. It's a property of power, not capitalism. That's the same argument that says "USSR/DDR/Cambodia/NK/etc was no real communism". We might excuse a few diversions from a political/economic system, but after some point, like with anything else, capitalism is what capitalism does time and again.
  - maratd 8y ago
    Not sure this makes sense to me? There's corruption in every system, regardless of the ideology behind it. Are you saying there's no corruption in communism? Because I have news for you, if you do. It seems like corruption is simply endemic to the human condition. It has nothing to do with capitalism/communism/etc. Whatever the system happens to be, we will find a way to corrupt it.

kimjongmin 8y ago

Also McDonald's https://www.imdb.com/title/tt4276820/ https://www.imdb.com/title/tt4276820/

geofft 8y ago

Reminds me of Galt's Gulch, where all the good guys name companies after themselves, and all the bad guys name themselves something generic like "Associated Steel".

eggy 8y ago
At least you know who is putting their skin in the game rather than some generic name. Also Tesla is not named Musk, or Amazon, Bezos.
- geofft 8y ago
  Why are they putting their skin in the game? What sort of decisions could WeWork, Tesla, or Amazon make that would ruin the personal finances of Neumann, Musk, or Bezos? There is still a corporate abstraction, so while profits turn into bonuses, losses don't turn into personal misfortune for the founders. (Although they may turn into personal misfortune for laid-off employees.) (And yes, the real world is not a fictional caricature.)
  - rdl 8y ago
    Musk has said and shown repeatedly that he'd put his last dollar into SpaceX (and probably Tesla), so he's not a great example here.
    - richardknop 8y ago
      Not sure about that. He maintains very luxurious lifestyle. His continuous investment in Tesla could be seen more as an effort to maintain full / majority shareholder control of the company. I don’t think he would sell his house and invest the money in Tesla. He would still be rich even if Tesla goes bankrupt. Plus he has billionaire family members as a fallback.
      - gowld 8y ago
        Who are Musk's billionaire family members?

datainplace 8y ago

I think its a clear conflict and shareholders should protest, but this happens at every level of the economy. I used to work buying small businesses. Its common for business owners to also own the building in a separate LLC. And its great to hear them complain about how they always get paid last, when they have been paid every month through rent.

cm2187 8y ago

But is Neumann is the sole shareholder? Musk certainly is not Tesla's sole shareholder. If Musk pays himself through some juicy Tesla contract, he is fleecing other shareholders.

modoc 8y ago
Only if the contract terms are worse for Tesla than another equal quality option in the market.
- cm2187 8y ago
  Right, but even then it raises a conflict of interest, and probably shouldn't be handled by the CEO directly.
gowld 8y ago
No, he is not. He is the controlling shareholder.

austincheney 8y ago

It is a product of personality. It takes a certain amount of risk aversion to risk everything to start a company, but that isn't what this is about. This is about investment and it takes selling yourself to convince people to give you money. A good sociopath lives for convincing people to give them what they want without reasonable limits. Fortunately, most people are not sociopaths, but unfortunately most of these people will not achieve the successes you described.

Slartie 8y ago
Maybe they would, if the sociopaths wouldn't assimilate many of those "successes". I consider a certain number of successful businesses to be a relatively stable statistical certainty in a society which provides the necessary environment for them (stable legislation, infrastructure, workers, a market to sell stuff etc.). The sociopaths now don't increase the total number of these successes, but they tilt the distribution of successes towards themselves as a group, thereby making non-sociopaths less likely to achieve a success.

captainbland 8y ago

Well I mean that's the consequence of capital ownership isn't it? It's not like these people are operating under some kind of constitutional obligation to their staff or anything.

praptak 8y ago
They are screwing (the other) shareholders.
- captainbland 8y ago
  Well sure, but chances are you're enriching the majority shareholder in this case. It's a per-share system not a per-person system.
  - byset 8y ago
    What's your point? He is still violating his fiduciary duty to the corporation by looting it to enrich himself personally.

coldtea 8y ago

>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. I'd rather this was the case completely -- privately owned, extensions-of-oneself companies and we had no BS like boards and stockholders...

ataturk 8y ago

Not enough emphasis on ethics being taught in business schools these days.

Spooky23 8y ago

It’s funny when companies do things that harm the public directly or indirectly, we get high minded passionate economists or whomever telling us how companies have a sacred duty to maximize shareholder value, blah blah blah. When you see countless companies get looted and crushed by private equity takeovers, to the point that middle schoolers can predict with accuracy when a company will vaporize, you get analysts with nonsensical stories about turnarounds, etc. But when self-dealing management use the company to enrich themselves in a way that is at best ethically questionable, you don’t hear too much.

scarface74 8y ago
If it isn’t harming the public directly or indirectly, why should we care? If a bunch of VCs want to enrich WeWork’s CEO, why should I care? Once mutual funds and pension funds start investing in WeWork, then I’ll care.
- Spooky23 8y ago
  Incubating a culture of corruption has some obvious negative impacts. There's also a variety of complications, from pension funds that do invest in VC funds, to national security implications of foreign principals funneling investments to individuals. You also have disruptive market behavior if we allow the boys with access to VC capital the ability to do whatever, while publicly traded real estate trusts need to meet regulatory requirements that prohibit that type of activity.
- maxxxxx 8y ago
  "Once mutual funds and pension funds start investing in WeWork, then I’ll care." there is a good chance that pension funds have already invested in WeWork, directly or indirectly. Where do you think the money is coming from? The VCs aren't putting in their own money.
- moorhosj 8y ago
  Pensions funds currently invest in venture capital funds. They also invest in REITs which are directly impacted by WeWork's business model.

SilasX 8y ago

Sorry for the naivete, but isn't that a solved problem in corporate governance, with standard procedures for making sure that company A isn't just a sockpuppet for shoveling money into company B?

howard941 8y ago
You shouldn't apologize, because it was a mostly solved problem and times changed. Search "corporate opportunity doctrine". It became unsolved in the last 30-40 years.
scarface74 8y ago
Corporate Governance doesn’t help when either the board is just a rubber stamp for the CEO or the CEO still holds a controlling stake in the company. And in the case of successful founders, even without a controlling stake, just their reputation makes it harder to go against the CEO. Could anyone on the board have challenged Gates or Steve Jobs 2.0? In the modern era, who would challenge a decision by Bezos or Hastings?
- achillesheels 8y ago
  Is that necessarily a bad thing? If Gates or Jobs acted unwantonly despotic, then the checks and balances are in place for their removal. Sometimes, reputations speak for themselves and must be respected as a function of following a leader.
  - scarface74 8y ago
    No it's not. I don't think anyone but Jobs could have made the deal with Microsoft that help save Apple[1]. Just like only Nixon could go to China. Could any other CEO besides Hastings transitioned Netflix from a DVD business to a streaming media business, and on top of that spend millions of dollars developing a set top box and then decide at the last minute it wasn't in their strategic interest to sell it and spin it off (Roku). The same could be said about Bezos and Amazon. [1] No the money MS "gave" Apple didn't save them. Continued software support with Office and IE helped a lot.

partingshots 8y ago

What does Shkreli have to do with Silicon Valley?

e40 8y ago

Yeah, this is not just in SV. Conflict of interest seems to be one of those things, in the last 20 years or more, that people do not give a shit about. I've seen it in a lot of places, and when I have conversations about it with smart friends, I don't get a rise out of anyone. I can only imagine what the average, working-class Joe/Jill think. If I had a conversation with them, they'd probably think I was some kind of nut. To me, this smells like American culture just being corrupt. EDIT: typo

luckydata 8y ago
It's been sold in the media for years, if you're successful then everything is permissible because "job creators". If you constantly glorify crime, that's how you get more criminals.
philwelch 8y ago
The fish rots from the head, and there's a pretty big precedent at the head of the US government in terms of conflict of interest. It's also worth noting that the US maybe 20 years ago was somewhat exceptional when it comes to conflicts of interest. In other cultures, personal relationships and personal vested interests that we would consider "corrupt" are a load-bearing part of the social structure. So perhaps we're reverting more to the global mean on this point.

mac01021 8y ago

Among the ambitious and entrepreneurial, this sort of behavior is nothing new. In his autobiography, Benjamin Franklin relates how he found himself as a government official for the colony of Pennsylvania and then proceeded to hire his own printing shop whenever his office needed to publish a widely circulated document or pamphlet. BTW, that autobiography is a great read. you can find it for free on Project Gutenberg: http://www.gutenberg.org/files/20203/20203-h/20203-h.htm http://www.gutenberg.org/files/20203/20203-h/20203-h.htm

gm3dmo 8y ago
If he lived in 2019 he would have just dropped it on an S3 bucket. What with your government being all like shut down and all.
nsajko 8y ago
I think the perception has changed a great deal since then. Note that the USA government hired on a spoils-based system until 1883: https://en.wikipedia.org/wiki/Spoils_system https://en.wikipedia.org/wiki/Spoils_system It would be brilliant to see an analysis of how commonplace this and other types of corruption were historically and geographically.

manishsharan 8y ago

Didn't the CEO of Sears own a hedgefund that became landlord of all Sears retail space ? My point is it is just not Silicon Valley.

Junk_Collector 8y ago
Yes, he sold property that Sears owns to companies he controls to fund stock buybacks from himself (and his companies), becoming Sears' landlord in the process.

Yuval_Halevi 8y ago

>There seems to be an archetype in silicon valley today of people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests. 100% with you here. When companies grows so much ego becomes part of the game.

arminiusreturns 8y ago

This happens even on the small scale. My SO was an exceptionally good paralegal at a law firm that was imploding due to issues like this, so after encouraging her, she convinced her boss to leave the firm and they started their own. It started doing well very quickly, and suddenly the lawyer she was working for became the very thing he hated in the first place. Doing stuff like spending 10-15k a month on the firms American express on hunting trips, spending so much time hunting he's in the office half the year, pulling multiple 5k "disbursements" a month for himself (on top of salary), to the tune of nearly 40k a month in personal expenses, and then for a few months had to take out a loan to meet payroll! Thankfully she sees the writing on the wall and is about to get her CPA and bounce, and I'm going to laugh when it all collapses around him because she's basically running the firm, but lawyers have a racket so you can't do profit sharing with the non lawyer plebs (by law) like paralegals so she gets a fraction of the pay to do most of the work while he lives the high life, which is exactly what imploded the old firm!

gaadd33 8y ago
How does the law prohibit a profit sharing plan at law firms? It's illegal to pay non lawyers bonuses?
- meddlepal 8y ago
  https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_4_professional_independence_of_a_lawyer/ https://www.americanbar.org/groups/professional_responsibili... It's a bit more nuanced.
  - SilasX 8y ago
    I see an exemption for "compensation", which I assume means "You can't pay out profits to non-managing non-lawyer silent partners, but you can do it for any non-laywer worker as part of their compensation arrangement." >(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and

dunpeal 8y ago

> Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty. Less relevant in WeWork's case, but very relevant in Tesla's case, since it's a public company, and in fact Tesla and Musk have been sued for neglecting their duties before: https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo-musk-accused-in-lawsuit-of-defrauding-shareholders-idUSL1N1V120W https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo...

magduf 8y ago
>The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty. Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. It's like investing in Sears under Eddie Lampert; you have to be a moron to put your money into Sears stock when it's obvious the guy is solely working to drain as much money out of Sears and into his own bank account as possible. And a lawsuit, even if you win, isn't going to net you much money.
- dunpeal 8y ago
  > Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. So you are saying the investors (who are the current shareholders) stupidly bought into Neumann personality cult. So now they are paying for their idiocy. This isn't some failure of capitalism: it's the failure of large, wealthy, sophisticated investors to properly assess their own investment.
  - magduf 8y ago
    Exactly, yes. It's the investors' job to research their investments, and company stock investments have no guarantees (unlike a CD or savings bond, for instance). Personality cult companies can actually be good investments; it just depends on the personality. Investing in Apple while Jobs was running it before he died was generally a very good and profitable investment, for instance. This company doesn't appear to be that way, and I'm saying that as someone who hasn't researched it, I'm just going on what a few negative news articles I've seen about them and their leader. The signs appear to all be there that this company is not a good long-term investment like Apple or Oracle (another company basically run by one guy), it's more like investing in Theranos.

conanbatt 8y ago

The person screwed in this transaction is the investor. They should sue.

rchaud 8y ago
But the investor (Softbank) is the one that bestowed its $47 billion valuation on the company. There are a few billion reasons why he wouldn't sue.

nwah1 8y ago

Actually, Shkreli got in trouble even though all of the plaintiffs had ultimately profited big time... but with some delay and period of uncertainty. Which shows that outcome is not all that matters, legally.

cma 8y ago

>Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies? Don't forget Michael B. Rothenberg: >The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.

drb91 8y ago

The risk to the CEO here is pretty small.

Gys 8y ago

> people viewing companies basically just as convenient extensions of themselves rather than distinct legal entities with separate interests I think it goes beyond that, by people viewing whole states as such extension

sonnyblarney 8y ago

Shkreli was trying to to good, and it was a personal issue, and it was kind of the right thing to do.

FireBeyond 8y ago
Let's not look at Shkreli like that. He's a guy who opposed FDA approval of a drug. Not based on its effectiveness, or medical benefit, but because it would interfere with his profits from a competing, inferior drug. This is not someone who has a strong history of "the right thing to do".

stcredzero 8y ago

Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! A CEO being the landlord strikes me as a big potential conflict of interest. For example, if the company needs to move to a larger space to grow, the CEO might want to delay to avoid losing income. Perhaps the company might have a prospective buyer who'd want to relocate everyone to their campus. In that case, there would be an external incentive for the CEO not to make the deal. Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? The way this used to work, is that the employee would become aware of a market need because the current company had that need and would be a great customer, so the employee spins out her own business, then leaves to run it.

unreal37 8y ago
Some people say that McDonald's Corp is not a restaurant, but a real estate company. They get other people to own and run the restaurants, but they buy and lease the land to them at a profit. So how is this different than WeWork's CEO owning the building and leasing it to WeWork? He's essentially acting like Ray Kroc.
- telotortium 8y ago
  In that case, McDonald's still owns the real estate, not Ray Kroc. Here the interests of the corporation and Ray Kroc (as shareholder of McDonald's) are aligned - McDonald's has no incentive to overpay for the real estate, because that would reduce its profits.
- CalChris 8y ago
  Did Ray Kroc personally buy real estate and then lease it to McDonalds to sublease it to franchisees? Was he on both sides of the transactions, leasor as owner of the property and leasee as CEO of the company signing the first lease?
- l33tbro 8y ago
  McDonald's are basically profit engineers. There franchisee terms here is Aus: • 20 year minimum lock-in for franchisee. • A monthly service/royalty fee based on a percentage of the restaurant’s gross sales (currently 5%). • A monthly rental being a fixed base rent and a percentage of the restaurant’s gross sales • A monthly advertising contribution of not less than 4% of gross sales. • All Outgoings including rates and utilities. Also a metric butt-tonne of start-up costs.

paulddraper 8y ago

> It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Isn't business defined as enrichment of the shareholders? So (depending on who owns the shares) it really shouldn't be amazing, right?

uberman 8y ago

This type of behavior is nothing new. Years ago, I worked as a developer at a very large silicon valley based company. Everyone here would recognize their name. It was common knowledge that the "corporate art" on the walls of the buildings was owned by various members of the "C-Suite" and leased back to the company. Don't even get me started on the private loans given to members of the C-Suite and Board then subsequently "forgiven". I used to rage about it every time they published their financials.

njarboe 8y ago

Some investors have decided that the best returns come from companies that have CEO's/leaders that run them like sole proprietorships. This works best when the CEO is actually the founder of the company. Investors with this philosophy would like to have that person have majority ownership of the company, but this rarely (never?) financially possible. Some companies have stock step ups that let the founder(s) keep voting control even though they don't have the majority of the stock. Google, Facebook, and Snap are some companies like this. Other very successful companies that have/had a single person that basically runs the whole place as their own company are Berkshire Hathaway, Apple, Oracle, Microsoft, Amazon. The top five American companies by market cap are of this type. I would not say the this is such a bad thing as these people are looking out for the companies long term future. Compare HP before and after the founders left. Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. If society needs these huge corporations (maybe we would better of with out them?), I would much rather they be run by a single human than be a soulless bureaucracy with a figurehead at the top. If Neumann fully owned WeWork, it would not be corrupt self enrichment to own the properties, just vertical integration. If the investors want them to work this way, is it really corrupt? I wouldn't think so.

magduf 8y ago
>Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. I'm not a big fan of HP, and I especially abhor the inkjet printer business, but I'd like to point out there's more to HP (and even their printers) than this. Their business printers are still pretty good AFAICT. My simple rule when contemplating a printer purchase: "do not ever, ever, ever buy an inkjet printer".

deepGem 8y ago

I couldn't read the full article since I am not a WSJ subscriber, so forgive the naivete, but what inherently is wrong in Neumann leasing a building that he owns ? I mean, he could have rented that building to someone else, instead he is leasing it out to WeWork. How did get get the money to buy that building - if he is siphoning money from WeWork revenues and using that, that's illegal I suppose. If he used Wework stock options as collateral to finance the building, that could be some grey area I guess.

zopa 8y ago
Is WeWork paying market rent to Neumann, or is it paying more? Did Neumann negotiate vigorously with Neumann for the best possible rate? With real estate, how could you tell? CEOs have a fiduciary responsibility to the other stakeholders of their companies. That's the problem here.
Aloha 8y ago
I agree with you, not only that, this kind of thing often happens with privately held companies.

sdfoisd98 8y ago

This isn't just a silicon valley archetype. It's a cultural archetype. Ownership is the religion we're indoctrinated with. To paraphrase James Madison, the Senate ought to protect the minority of wealthy owners from the majority. Deference to wealth and ownership is in the DNA of the country. America is a tacit caste system, heavily indoctrinated to believe it's a freer place than it is. While there's a stronger guarantee of freedom of speech/expression than other countries, who owns our time/effort is rarely ever discussed and the realities of it questioned. The owners do, of course, and direct it to their desires.

jonhohle 8y ago

In the Phoenix metro area we have BASIS schools that use a similar tactic… with public education funds. The school and foundation are non-profit, but they use a for-profit management company that's owned by the founders of the schools. No transparency is required for the private business which provides teachers(!) and other back-office services. Of course, the founder is living meagerly like most educators (including the ones he employs or the one's he's taking funding away from)… wait, no, he's raking in the cash. That said, BASIS provides an excellent environment for students that are compatible with its education model (read: students who would have been successful anywhere).