Well here’s something you don’t see every day: a company declaring that one of its top leaders is so notorious for misconduct that his very presence at the business qualifies as a material risk to corporate success that investors should know about.
So said World Wrestling Entertainment last week about its longtime and larger-than-life leader, Vincent McMahon. McMahon is the majority owner of WWE, and had been CEO of the company for decades until he resigned last summer amid sexual assault allegations from numerous women. In January, however, McMahon engineered a boardroom coup at WWE and had himself re-installed as executive chairman.
As corporate governance goes, clearly this arrangement is about as messy and painful as a Figure Four. So when WWE filed its annual report last week and included the legally required disclosure of material risks to the business, the company included this doozy:
The company’s board of directors and management have undergone recent changes. These changes could cause disruptions to our operations. Mr. McMahon’s return to our board of directors as executive chair also could expose us to negative publicity and/or have other adverse financial and operational impacts on our business. His return also may result in additional scrutiny or otherwise exacerbate the other risks described herein. Any of these outcomes could directly or indirectly have adverse financial and operational impacts on our business.
Let’s just say that again once more, to marvel at the craziness of it. There is a publicly traded, billion-dollar company telling investors that its largest shareholder and top executive is, unto himself, a material risk to the business.
Some days the WTF-o-meter just doesn’t go high enough.
Drama Fit for a Wrestling Match
How did WWE get here? The root cause is a dual-class share structure that has given McMahon outsized voting power for decades. He has ultimate control over who serves on the board and what shareholders decide to do.
McMahon used that power in January to push two WWE directors out the door and replace them with loyalists. The newly constituted board then brought McMahon back and installed him as executive chairman. His own daughter, Stephanie McMahon, who had been board chairman and CEO since last year, said, “I cannot put into words how proud I am to have helped lead what I consider to be the greatest company in the world,” and then resigned.
Ostensibly McMahon made all these moves because WWE is undergoing a “strategic alternatives review” and those talks require his “direct participation, leadership and support.” At one point the rumor was that WWE would sell itself to a state-owned investment fund in Saudi Arabia, although WWE executives say those rumors are false.
But thanks to that dual-class share structure and McMahon’s voting power, the company had to make yet another eye-popping disclosure:
Through his beneficial ownership of a majority of our Class B common stock, Mr. McMahon can exercise control over our affairs, and his interests may conflict with the holders of our Class A common stock… His interests could differ from, and conflict with, those of the holders of our Class A common stock and there can be no assurance that Mr. McMahon’s voting control of the company and his role as executive chairman will have a positive impact on the strategic initiatives processes or the company as a whole.
Just, wow. WWE might as well have announced, “If you buy our shares you’re putting yourself in a full nelson with McMahon holding your arms” and saved itself the rest of the boilerplate.
Bad Governance Begets Bad Governance
McMahon’s power move, and the preposterous disclosures WWE had to make because of it, demonstrates a powerful point: bad governance begets more bad governance.
The first instance of bad governance was that dual-class shares structure. Such arrangements concentrate too much power in too few hands. That concentration of power then leads the person wielding it to believe that he— and let’s not kid ourselves, it’s always a he — can do no wrong. The company ends up with larger-than-life leaders whose personal ambitions eclipse everything else, including good ethical priorities and sound business judgment.
At Facebook and Twitter, those concentrations of power have led to business decisions that are questionable at best, if not outright dumb. At Wynn Resorts, it led to Steve Wynn treating his hotel and gambling empire as a personal plaything, including sexual assaults against female employees that the company hushed up for years. McMahon and WWE are just the latest example of the broader point.
When a corporation lacks structures to check larger-than-life personalities — or worse, when the company embraces structures that enhance and enshrine the power of such men — you end up with a mess. Bad governance begets more bad governance. Or, as Lord Acton said, power tends to corrupt, and absolute power corrupts absolutely.
Hence the need for guardrails around that power. Otherwise you’ll be wrestling with poor choices for years to come.