Here we go again!
It’s hard to feel bad for the investors and banks who lined up to place their bets on a company whose founder’s persona is inextricably-linked to the company itself. By now investors ought to understand that things like this can happen. History provides us with a long list of founders who caught up in their self-importance or their untethered ability to impose their impulses on others have deeply tarnished or in some cases sunk their own companies. Another is about to occur.
We aren’t really surprised by the human failings of those who are in power. John Emerich Edward Action (we’ve grown to know him as Baron Acton) noted at the start of the twentieth century: “power tends to corrupt, and absolute power corrupts absolutely.” Whether it is the “bro” culture promoted at Uber, racist comments made by “Papa John,” the temptation to trade on insider knowledge by Martha Stewart, or just executives who can’t keep their pants on and have the power to coerce others into succumbing like Weinstein, CEOs all too commonly step over the boundaries that can financially or even legally impact their companies.
But whether we are surprised by the behavior or we just turn a blind eye, it seems to be a common occurrence that investors in these companies fail to comprehend the risk of this concentration of power. When the founder’s personality is merged with that of the company, the fortunes of the company will depend upon the founder’s behavior.
One on hand, a charismatic founder personality can have a gargantuan positive impact on the prospects for the company, as Harvey Weinstein no doubt did for his.
Charismatic founders are quite attractive to early talent as well as to investors and customers. But as a company scales and the stakes increase in both breadth (number of interested constituents) and depth (magnitude of their investments) every stakeholder should realize they are just one founder’s bad act away from ruination.
Certainly the board members of Weinstein & Co understood this, but failed to act to protect their stakeholders. According to the New York Times, the Board was aware of Weinstein’s behavior for at least two years.Lance Maerov, the board member who handled Weinstein’s employment contract negotiations, acknowledged the numerous settlements paid to the recipients of Weinstein’s behavior, but defended the board’s inaction by determining the payoffs were for consensual relationships and did not come from company funds. Assuming Maerov was not the lone board member aware of this information, you’d have to believe that the guys (all nine were male) who made up the Board (four have since resigned) were complicit - not in the sexual activities in which Weinstein has been accused of - but in keeping this information private and not taking action. Perhaps the reason they didn’t act was because it would have been costly.
Had the board gone public with the information about Weinstein’s proclivity for his casting couch behavior, it likely would have impacted each board member’s relationship with Harvey himself, something even “A” list celebrities were want to do. By not acting, they probably thought they were protecting their investment and licensing deals with the company. But it turns out they were wrong.
Like most bad acts, the deed itself may be culpable, but the big damage comes from the cover up. It’s very difficult to believe that the Board’s attempt to first deny knowledge then its subsequent attempt to weasel out of responsibility - since it “did not involve the company” and there were no “current claims” - won’t leave lasting smears on all eight of these gentlemen’s reputations as well as on their organization’s pocket books. By not acting when they should have, their investments are now at entirely at risk. Their personal and organizational reputations sullied while they enabled another two years of Weinstein’s continued coercion.
Next time, prudent investors and banks will better weigh the risks of betting on a “sure thing” founder. Next time, they will pay more attention to corporate governance, put in a truly independent board, and keep a tight leash on their executives. Next time, the company will have a ready-to-execute transition plan to immediately replace the transgressor. Or, more likely, next time we will have forgotten all the lessons of the past.