The Warren Buffett lesson Hamish Douglass is yet to learn

Magellan founder Hamish Douglass declared in September he is not an emotional man.

Speaking on an industry podcast, Douglass quoted investment legend Warren Buffett who has long argued stock picking needs to be free from feelings.

“I’m lucky I’m fairly emotionally detached from things ... I’m not that emotional. Maybe that’s why I’m an oddball,” he told Inside The Rope podcast.

These comments took on new meaning this week, after a series of events forced Douglass to disclose his marriage had broken down.

There is one professional lesson Hamish Douglass is yet to learn from Warren Buffett. Credit:

The split raised questions about whether a divorce would impact the couples’ joint shareholding in Magellan, which would trigger a liquidity event for the ASX-listed firm.

But, more concerning, whether Douglass’ personal turmoil had impacted his ability to do the job.

Douglass has long taken inspiration from Buffett, studying Berkshire Hathaway reports and regularly quoting the 90-year-old’s investment philosophy.

While the two investors are world’s apart in terms of scale and influence, they share a common problem – key person risk. If an investment firm’s success and reputation becomes too closely tied to one individual, what happens when a cloud forms over that person? How soon should succession planning commence? And how public should a company be about its plans?

Veteran businessman Don Argus says the days of “command and control” leadership are over. Today, boards must constantly cultivate the next generation of leaders and be transparent with investors and the public.

“When you have to hurry your succession, you don’t get the best outcomes,” Argus says. “The earlier you start, the better.”

‘Personal reasons’

Magellan’s share price sunk to its lowest point in two years this week amid a chain of events starting with a short ASX-statement released at 6.01pm on Monday.

Magellan’s board had been informed that chief executive Brett Cairns had resigned “for personal reasons” and would leave the company immediately.

The statement’s lack of detail created an information vacuum, sending the industry rumour mill into overdrive and triggering a sell-off when trading opened the following morning.

The abrupt resignation came after months of pressure as Magellan’s flagship global equities fund suffered chronic underperformance, causing some investors to take their money elsewhere.

But Cairns was not your typical CEO. He had no control over Magellan’s investment strategy and his bonuses were not tied to the fund’s performance. Though he oversaw Magellan’s diversification strategy, Cairns’ role was largely administrative and he earned a fixed pay grade almost half that of Douglass’.

Former Magellan CEO Brett Cairns.Credit: Janie Barrett

Cairns is regarded in the industry as a softly spoken but hard-nosed businessman. Having grown up in working-class western Sydney, Cairns did not find success the easy way. His relentless work ethic saw him excel through top investment firms Merril Lynch and Credit Suisse and complete a PhD at the University of Sydney. “He won’t say a lot, but he’s really intense,” says one of Cairns’ associates from the early 2000s.

But despite working at Magellan for more than a decade, climbing his way to the very top role, Cairns’ name was not widely known outside of Australia.

“I hadn’t heard that name until this week,” says Ben Hodges, who worked for Magellan’s largest client, St James’ Place, until February this year. “Hamish was the frontman.”

The market sell-off was not so much tied to Cairns’ departure, as to what it revealed about the dysfunction inside the 15-year-old company. As Magellan now scrambles to find a new chief executive, Boyden managing partner Allan Marks says the lack of succession planning for key personnel has been thrust into the spotlight. “Publicly, they don’t seem to have one at the moment, do they?”

Influential proxy adviser Vas Kolesnikoff says Douglass’ mortality was first acknowledged in 2016, when shareholders were asked to fund a $10 million life insurance payment to his family in the event he died.

This was eventually knocked back as being an outrageous proposal, but Kolesnikoff says the saga reminded investors of Magellan’s key person risk, which remains today. “Most companies are telling me about succession planning,” he says. “You don’t hear that out of Magellan. If something happens to Hamish, Magellan stock will be materially affected.”

Much like Berkshire Hathaway’s credit rating was downgraded by US ratings agencies in 2009 over the ‘key man risk’ with Buffett, Magellan now provides a local example of the dangers of tying a company’s stability to one man.

Jason Johnson, who runs executive search company Johnson Partners, says for Magellan, this risk is real.

“Magellan is a case study in key person risk playing out in a very public and very value destructive way,” he says. “If you think about a company with a multibillion dollar market capitalisation, having a perception of an organisation that is rudderless or without sufficient leadership is a genuine risk for investors.”

Johnson says founder-led organisations, like Magellan, present particular problems for succession planning. “Sometimes the founder is less willing to give up leadership to others,” Johnson says. “The interesting thing in Hamish’ case, he is the chair, there is a full change of governance structure that’s required which can throw up some opportunities, but it also has some inherent risks because change always drives a degree of execution risk.“

This year, Berkshire Hathaway took the unusual step of releasing a multi-layered succession plan for Buffett. Not only was the immediate successor announced, Greg Abel, but the next in line was also made public, in the case of an unexpected event caused Abel to become incapacitated.

“The market responded incredibly favourably to that,” Johnson says. “It addressed the elephant in the room.”

Marks says funds management firms are particularly vulnerable to key person risk, as celebrity stock pickers gather dedicated followings. But there is one glaring difference between Berkshire Hathaway and Magellan.

“To go back to the Buffett example, they have got people in place that can step in. That’s the difference. They have a pool of very accomplished investment managers in this team.”

Whereas at Magellan, the pickings are not as rich. Argus says this need needs to change. “I don’t know whether Hamish has a successor in place ... But if you look at Warren Buffett, he openly talks about succession plans. That’s good.”

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