WeWork’s recent IPO prospectus included more than a few startling details, but here’s just one of them: CEO Adam Neumann, the company’s founder and majority shareholder who controls the entire direction of the company, has no employment agreement.
On the company’s Form S-1, WeWork, which owns hundreds of co-working spaces around the world, noted that its future success depends, in large part, on the continued service of Neumann. But, because there is no employment agreement, that “cannot be ensured or guaranteed.”
“Adam has been key to setting our vision, strategic direction and execution priorities,” it reads. “We have no employment agreement in place with Adam, and there can be no assurance that Adam will continue to work for us or serve our interests in any capacity. If Adam does not continue to serve as our Chief Executive Officer, it could have a material adverse effect on our business.”
For a company valued recently at $47 billion, this is a shocking admission, considering what’s at stake. It’s also a stark reminder of the importance of the protections afforded by employment agreements and the thorough screening and proper onboarding of new C-suite members.
Evolving Nature Of Employment Agreements
While it’s surprising WeWork has no employment agreement with its CEO, Neumann isn’t the only leader of a major corporation to operate without the paperwork. Steven Hall & Partners’ 2018 survey of the country’s 200 largest companies found that 23% of those organizations do not have any form of employment agreement for their CEOs, despite their many benefits.
Employment agreements are legal documents that map out the relationship between an employee and an employer. They set out details such as performance goals, salary, bonuses and any equity the employee might be eligible to receive. They also determine how either party can terminate the agreement and what happens if an employee leaves a company before the contract has expired, including particulars about any severance package.
Many agreements go even further than that. In some cases, for example, C-level employees are brought on for a specific reason and a short period of time to shore up a company before it goes public or to address a specific need. Their agreements spell out what happens after the leader leaves the organization and may clarify how soon they can work for competitors once they leave and what knowledge they can transfer from one organization to the next.
Despite their advantages, however, new rules and regulations may be prompting some companies to move away from employment agreements. Litigation and legislation are targeting two common provisions: non-compete clauses and non-disparagement clauses.
Some courts have ruled that non-compete clauses, which prevent a former employee from immediately hopping to a competitor, are unenforceable. In fact, in a 2018 agreement with New York’s attorney general, WeWork ended what officials said were the company’s “overly broad” non-compete requirements for nearly all of its employees.
And a growing number of states are banning non-disparagement clauses, which aim to prevent people from denigrating a former employer. Legislators in Maryland, New York and Vermont have passed laws generally resulting from the #MeToo movement that would effectively outlaw non-disparagement and non-disclosure clauses or other waivers of rights to bring a claim of sexual harassment or assault in the workplace. In California, SB 1300 makes it unlawful for an employer to require the signing of a non-disclosure agreement or waiver of the right to file claims concerning sexual harassment.
How To Hire The C-Suite
While these new laws and rulings are forcing employment agreements to evolve, they don’t make them worthless. What’s more, employers have a duty to their organizations to screen executive candidates, assess their loyalty to former employers and boards, and uncover any red flags raised during their previous engagements.
When hiring a new member to a C-suite, here are three things organizations need to do.
1. Don’t Trust Your Gut
Company executives may be steering the future of major corporations, but a 2018 HireRight survey of employers found that 42% of global respondents know of people within their organization who rely simply on “gut instinct” when recruiting for high-profile positions.
Nearly the same number of people said that it’s possible that their organization’s board members may never have had their qualifications, experience and criminal records checked. Almost one-third of respondents said people go through fewer tests and interviews to get a job as a CEO than as an entry-level hire within an organization.
Headlines of top executives losing their jobs simply for lying on their résumés should remind us that gut instinct isn’t enough when we’re onboarding somebody to run a company — whatever the size. It’s vital to vet new applicants at every job level to reduce an organization’s employment risk.
2. Conduct A Thorough Screening
Background checks should include a comprehensive look at the job candidate’s education, work history, potential conflicts of interest and financial responsibility, along with a criminal records search.
For C-suite candidates, organizations must dive into the person’s participation in directorships and corporate boards. Those searches should include investigative reports with individuals they have worked with at other organizations and boards to understand what they contributed and uncover any red flags, such as disciplinary actions or policy violations.
It’s worth noting that California recently made it easier for hiring managers to inquire about a job candidate’s actions. AB 2770 specifically requires that employers be transparent regarding sexual harassment or sexual assault that occurred in the workplace, and protects them when they do so.
When prospective employers conduct reference checks, current or former employers in California now face no fear of retribution under the law for slander or libel when they share information about an employee’s past conduct. The law is the first of its kind in the country, but similar legislation in other states is likely coming soon.
3. Understand The Value Of Employment Agreements
Despite the evolving legal landscape, and even without non-disparagement and non-compete clauses, employment agreements still matter. They set out performance-based goals for executives and provide all parties assurances that even if things go south, there’s a road map to work from.
Without them, companies face enormous risk as executives move in and out. Or, like with WeWork and Neumann, the lack of an employment agreement could turn up in a perplexing paragraph in a public document and threaten the value of an entire company.
