What did WeWork teach us about ‘private-company’ compliance?

As the leader of a private company, WeWork’s former CEO Adam Neumann clearly wasn’t subject to strong expense reporting requirements or conflicts of interest processes — he threw extravagant parties, routinely hired his family members and close friends, and engaged in numerous related-party transactions. But as Neumann and WeWork learned, those lax standards, often common for privately held companies, can bring disaster for companies hoping to go public.

By relying on its vision and mission to carry it to success while neglecting strong governance, WeWork disregarded the more practical realities of operating a responsible company. When its IPO fell apart, there were significant consequences not just for the company’s early backers but for the thousands of employees now wondering if they’ll have a job tomorrow.

With WeWork’s IPO fiasco still fresh, here are five lessons that stand out about private companies and compliance and ethics programs:

Private companies are held to many of the same standards as public companies — and often face the same consequences. They may not have thousands of shareholders or the SEC to report to, but private companies are still subject to the anti-bribery provisions of the FCPA, some parts of Sarbanes-Oxley, the Sherman Act, OFAC regulations, the Federal Sentencing Guidelines, and many others. Private companies can be hit with the same penalties as public companies for legal and regulatory lapses. And for ethical rather than legal problems, they can face the same powerful backlash from the public, investors, customers, partners, and other stakeholders.

“Private” doesn’t mean “small.” Companies like WeWork can have a global reach and the same large workforce as public companies — and hence face many of the same risks related to bribery, conflicts of interest, harassment, governance, data privacy, third parties, and so on. Rapid growth exacerbates many of these risks. No company tries to create problems, but they should all have the pieces in place in case problems happen. Fortunately, the majority of employees bring concerns to their immediate manager (62 percent according to Ethisphere’s global dataset), so what’s required are engaged and empowered managers who know what to do when an employee speaks up.

Preparing for scrutiny before the madness of an IPO. Going public is about more than just selling stock, as WeWork and many other private companies have discovered. It’s about becoming accountable in ways that may be unfamiliar. A private company with IPO ambitions can expect to be put under a microscope — financially, organizationally, culturally, and legally. Being prepared for that scrutiny by having a strong ethics and compliance program already in place reduces the possibility that issues will emerge that could threaten the IPO and even the company’s future wellbeing and existence.

Private equity firms have their own requirements. The lead up to an IPO isn’t the only time private companies can expect to have their internal compliance and governance systems evaluated. Many private equity and venture capital firms, as well as other institutional investors, have their own requirements for investee companies. These firms have just as much incentive as public shareholders to make sure they’re putting their money into a company they believe is somewhat inoculated against ethical challenges. Indeed, Softbank is tightening its governance requirements, having learned its lesson from the WeWork meltdown.

Compliance and ethics matter more than ever. Ethical companies are more attractive to investors, customers, and potential employees. Millennials consider the reputation and culture of potential employers when deciding where they want to work. Ethisphere’s analysis shows that the World’s Most Ethical Companies outperform the U.S. Large Cap Index by about 14 percent over five years. If private companies want to attract the best employees, grow their customer base, and attract investors, they need to do business with a commitment to integrity, and a clear way to demonstrate that commitment is a strong compliance and ethics program.