CryptocurrencyInvestingBanksReal Estate

3 Ways WeWork Board Members Can Pressure CEO Adam Neumann to Step Down

September 24, 2019, 12:51 PM UTC

The postponement of the WeWork IPO was apparently only one act in the company’s corporate drama. Over the weekend came reports that some factions on the WeWork board want to oust co-founder and CEO Adam Neumann. The group reportedly includes Masayoshi Son, founder of SoftBank Group, WeWork’s largest investor. And then, Reuters reported, Neumann was said to be in talks with some board directors and investors over his future role in the company, although he had not agreed to step aside.

On the surface, it seems technically impossible for any portion of the board—or even all the directors taken together—to force Neumann to do anything. As the company’s Securities and Exchange Commission filings make clear, an unusual stock structure lets him “exercise voting control.” Neumann could theoretically call a shareholder meeting, fire his opposition on the board, and vote in his choice of replacements.

But the appearance of absolute power doesn’t guarantee its actual existence, as Jeffrey Sonnenfeld, the Lester Crown Professor of Leadership Practice at the Yale School of Management, explains to Fortune. “Any contract, like any constitutional right, is not without limits. That can be abused and taken away for improper conduct,” says Sonnenfeld. (Citing a pre-IPO quiet period, WeWork declined to comment. Fortune left multiple messages for the designated U.S. PR representative for SoftBank but did not receive a response.)

Indeed there are a series of escalating ways members of the board could attempt to convince—or pressure—Neumann to give up the role of CEO.

Persuasion

Never underestimate the power of conversation—like the ones reportedly in motion. That starts with the board members making a strong case.

“The performance has not been there and that can be one of the reasons why [part of] the board wants to act,” says Alan Wink, director in the capital markets practice of advisory and accounting firm EisnerAmper. “The [faction] may be questioning Adam’s ability to run a public company at scale. [They have to] convince Adam that for the company to take off and have a successful IPO, maybe they need different leadership.”

That step seems to have begun, but so has another part of persuasion: the leak of the story that part of the board wanted to push Neumann out. “Public pressure” is one tool a part of the board has at its disposal, says Anand Sanwal, CEO of market intelligence firm CB Insights, which leases its space from WeWork. “If the broader team doesn’t have faith in him and [some] people internally are pushing for his removal as CEO, it becomes much harder for him to stand in this role.”

Legal Maneuvering

The board group’s next tool against its chief executive would be legal. “It’s not a public company, but the stockholders are the Vision Fund from SoftBank and the other venture capitalists that backed him,” Wink says. “[Neumann] has a fiduciary responsibility. There’s been a lot of violations of good corporate governance here.”

If board members have knowledge of anything improper, or can make a case that Neumann’s public actions harmed the company and resulted in a breach of fiduciary responsibility, that can be used as leverage against him. Threats of clawbacks of past compensation extend the related pressure the board group looking to push Neumann out could bring to bear, says Sonnenfeld.

Personal Loan Repayment

Then there is the potential of a personal loan squeeze. Neumann cashed out about $700 million ahead of the IPO through a combination of sales of his own shares and debt. That increased the dissatisfaction of backers. “Significant non-SoftBank investors are quite angry that they can’t get any of their money out the way he did,” Sonnenfeld says. And the loans offer those opposing Neumann’s continued participation as CEO an opening.

According to the S-1 filing, “UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, affiliates of the underwriters in this offering, have provided a line of credit of up to $500 million to Adam Neumann, of which approximately $380 million principal amount was outstanding as of July 31, 2019.” That could allow some board members, acting either directly through WeWork or in concert with the underwriters, to push for an immediate repayment.

“They can call his loans and make him pay cash,” Sonnenfeld says, pointing to pressure that resulted in Neumann returning funds he had received for use of the word “We.” (The company initially had paid Neumann $5.9 million for the use of the “We” corporate name. An amended S-1 showed that he returned the money and left the company with the naming rights.)

There is indirect pressure through the company, as well. WeWork showed a net positive cash flow increase of $844.7 million in the first half of 2019. That, however, included $3.4 billion in financing. Absent that injection of money, the company would have run through all the cash and cash equivalents it had left at the end of June 2019.

WeWork will continue to need cash going forward, especially if the billions initially expected from the IPO don’t become available. So, the company needs the good graces of its biggest investors, perhaps now more than ever.

WeWork’s Bottom Line

Neumann’s “very public presence that he used to argue was to the advantage has a detrimental effect,” Sonnenfeld says. “His reckless behavior has endangered the company. That’s the gun they have to his head.”

WeWork’s business model depends on short-term tenancies; we may find out this week if that also applies to its CEO.

More must-read stories from Fortune:

Airbnb plans huge IPO in 2020, continuing push by tech companies to go public
—Passive investing has exploded. But here’s why fears of a bubble are overblown
—Why the next recession may feel very different than 2008
Social Security increases in 2020 will be noticeably smaller than this year
U.S. recession indicators haven’t made up their minds
Don’t miss the daily Term Sheet, Fortune’s newsletter on deals and dealmakers.