WiseTech fracas highlights the double-edged sword of star CEOs

Board members at companies with superstar CEOs, like Richard White’s WiseTech, need to have a track record in successfully challenging overbearing founders.

WiseTech Global founder Richard White.

Are financial success and good governance inside listed companies mutually exclusive?

Perhaps one of the more successful investments strategies employed in recent years is the one that invests in a concentrated portfolio of founder-led companies. Think about how much money has been made investing alongside Bezos, Gates, Jobs, Zuckerberg and Musk in the US, or the Browns at ARB, the Wilsons at Reece or the Scalis at Nick Scali in Australia.

Founder-led firms tend to be more focused on innovation and long-term strategy. They often have a strong company culture rooted in the founder’s vision, take more calculated risks, can be more disruptive and insurgent, and almost always focus on long-term growth rather than short-term gains.

And global research, from Bain & Co, Bessemer Venture Partners and Credit Suisse, supports the notion that founder-led companies tend to outperform.

By way of another example, a $100,000 investment in Richard White’s WiseTech five years ago would have grown to $860,000 by February 7 this year.

But founders are people, and people can let you down. Investing in founder-led companies therefore offers a double-edged opportunity. A shareholder who invested $100,000 in WiseTech on February 7 has seen the market value of their investment fall to $75,000 at the time of writing.

The recent turmoil at WiseTech, the Australian logistics software giant, has sent more than a few shockwaves through the investment community. On Monday, four independent board members resigned over a power dispute involving founder Richard White, causing the company’s shares to plunge.

Simultaneously, questions about corporate governance in founder-led companies and protecting minority shareholders’ interests are now being raised.

The resignations came after disagreements over White’s new role at the company. White, who stepped down as CEO in October last year following allegations of misconduct, returned to WiseTech, after a brief suspension, in a consulting role as “founder and founding CEO.”

Stepping down as CEO and returning as a different form of CEO understandably raises questions about the effectiveness of an independent board to represent shareholders with a smaller stake.

Some observers must have certainly thought those questions were answered when the board members resigned.

The situation at WiseTech highlights the delicate balance between leveraging a founder’s vision and maintaining robust corporate governance.

For me the biggest issue raised is the ability or inability of a board of directors to maintain their independence and keep their job while challenging powerful founders who may also be, and often are, the largest shareholder.

The resignation of four independent directors signals a potential breakdown in any system of checks and balances necessary for effective corporate governance. Boards often have the job of maintaining economic incentives but it must be balanced with sufficient levels of transparency and accountability.

At the same time, shareholders, particularly minority stakeholders, may be vulnerable when a founder wields significant voting power. The reality might be that companies with influential founders are more likely to deviate from the “one-share, one-vote” principle and instead maintain a dual-class mental frame­work that entrenches manage­ment control, with a rising share price attributed to that approach.

But in such cases, there will be times when the concentration of power leads to decisions that may not align with the interests of all shareholders. As Paul Keating once quipped: “Always bet on self-interest.”

Investors should always be aware of the potential risks associated with founder-led companies. As I have demonstrated, while these companies can offer significant growth potential, they also have unique governance challenges that can adversely affect shareholder value.

To improve governance and protect minority shareholders, several measures can be considered. These might include striving for a diverse and truly independent board with members who are charged to challenge the founder and permitted to do so without fear. Companies can also implement and commit to robust disclosure practices and transparency in decision-making. If you don’t like it, don’t be a public company!

While recognising the value of a founder’s vision, companies should implement board operating mechanisms that ensure the influence can’t override good governance practices.

Several countries have recently implemented the “Doing Business” reforms proposed by the World Bank Group to enhance minority shareholder protection. These reforms focus on areas such as information disclosure, related-party transactions, and the right to sue.

It would also be sensible for boards to focus on developing a strong succession plan to ensure continuity and reduce reliance on a single individual.

For investors considering founder-led companies, it’s vital to assess a board’s composition and look for a majority of independent directors with a diverse background, a track record of success financially and some examples of successfully challenging overbearing founders.

Recent founder-led crises at listed companies exemplify why we need a strong independent media. Through the digging, questioning and reporting of journalists, investors become aware of red flags in founder conduct, such as related-party transactions or use of company resources for personal benefit. It also enables investors to be kept abreast of company announcements, particularly those related to governance changes or leadership transitions.

But while addressing an immediate crisis is essential – as is the alignment of an influential founder’s values with your own – investors should also focus on the company’s long-term strategy and operational strengths.

The WiseTech fracas serves as a reminder that even hugely successful, founder-led companies aren’t immune to governance challenges that can seriously crimp retirement savings. Meanwhile, the outcome of any governance crisis can have far-reaching implications for how founder-led companies balance entrepreneurial vision with the principles of minority shareholder protection.

Roger Montgomery is founder and CIO of Montgomery Investment Management