From WiseTech to MinRes: Why investors hate founders quitting

WiseTech’s shares rallied on Richard White’s exit and now MinRes is under pressure, so what’s the long-term outlook for companies when founders leave? Not good.

Billionaire founder of WiseTech Richard White last week quit as chief executive. Picture: Jonathan Ng

WiseTech shares briefly surged when founder Richard White declared he was immediately stepping down as chief executive. The billionaire’s exit – on paper at least – was the circuit-breaker sorely needed for the tech company as drama and allegations were building over White’s private life.

But what’s the longer-term outlook for WiseTech? Or even Mineral Resources, which is another troubled founder company, if Chris Ellison steps down?

Companies generally underperformed after the exit of their founders from management roles. Picture: Gaye Gerard

A sweep by brokerage Macquarie on the performance of companies following the exit of founder from a management or operational role shows that in general the share price underperformed up to a year after the exit.

Granted, the pool of large companies is not large with just four companies under the microscope – Computershare, Fortescue, Seek and Xero. In all of these examples, the founder stayed involved in the company in some way, by remaining on the board or transitioning to a chairman.

Of these, only Xero – an accounting software specialist – outperformed in the year after the retirement of founder Rod Drury. In that case it was a smooth transition from Drury as he handed over to a highly-experienced chief executive, Steve Vamos.

From there, Xero went from strength to strength, delivering excess returns of more than 50 per cent in the 12 months after the announcement. Helping the gains, Drury was a champion of his new CEO, as the founder recognised the limits of his own ability to manage the fast-growing company.

For Computershare, Fortescue and Seek it wasn’t so easy. All of them underperformed in the immediate aftermath of the announcement, and the falls accelerated over a 6-month and 12-month period. It’s worth noting that in each case it was a smooth transition.

Even for miner Fortescue, which in recent years has had rapid management turnover, the transition in 2011 from Andrew Forrest to Nev Power as CEO set the miner up for years of management stability. While Magellan wasn’t part of the Macquarie study, not only was there a share-price slide following the exit of co-founder Hamish Douglass, it also coincided with billions of dollars in funds being pulled from the asset manager.

And this goes to the second finding from Macquarie; it’s far better for the share price when companies promote from within compared with looking outside.

Both National Australia Bank and Westpac have recently named their new chief executives from inside their ranks.

Looking at nearly 150 executive transitions across the ASX, Macquarie found internal hiring showed a slight underperformance following the announcement and then a rebound the next year. The medium excess return for external hires is minus 6 per cent in the six months following the announcement. This shouldn’t be a surprise as externals usually bring a new strategy and this comes with plenty of management disruption.

Mineral Resources chief executive Chris Ellison. Picture: Colin Murty

For WiseTech and possibly MinRes there could be more management instability to follow.

Richard White’s exit last week showed the $40bn company had no clear succession strategy in place. Chief financial officer Andrew Cartledge has delayed his planned retirement to stay on as acting chief executive. The WiseTech board, led by Richard Dammery, has begun a global search looking for White’s replacement. In time, Cartledge still plans to retire which means more change is coming to the executive ranks.

WiseTech surged as much as 20 per cent on last Thursday’s resignation note, however the shares have since drifted back slightly to be up 12 per cent. There are still questions over how White’s future long-term role as a consultant will be handled.

Elsewhere, iron ore-to-lithium miner MinRes is under pressure as its board reviews historical payments and the business affairs of founder Chris Ellison.

The Australian earlier Monday reported MinRes is working on a crisis succession plan to replace Ellison as managing director, although a number of big investors want him to stay.

For both WiseTech and MinRes, while the odds are stacked against them the moment of transition could still represent a turning point.

Xero has shown the way when a high-velocity company with the right chief executive can move to the next level. But that’s as long as the relationship with the founder can be managed.

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Originally published as From WiseTech to MinRes: Why investors hate founders quitting