Sex, Lies, and Founders: WiseTech’s Board and the Realities of Governance
Are founder-led public companies and corporate governance compatible? A board of directors seems a little redundant if the only way they can challenge the rock star founder is by resigning.
#wisetech #corporategovernance #richardwhite
Roger Montgomery, writing in this weekend’s Oz, warns investors about the fortunes and failures of founder-led firms. He suggests that shareholders can certainly ride high on the hog’s back of star CEOs. The evidence is there: the big dual-class companies in the US have been hot earners for investors, these companies often have a better vision-based culture that keeps everyone humming, the numbers show they outperform their competitors.
But it ain’t necessarily all good. Founders can unfortunately misbehave, and in very damaging public ways. Case in point is the alleged misconduct by WiseTech founder Richard White, which has been beaming across the nation’s business papers for at least six months now. This week, four NEDs of the WiseTech board pulled up stumps and walked off, claiming “intractable differences” with the direction of the company. This was after White had returned under a consultancy agreement that was basically the same as his CEO contract, despite there being ongoing legal investigations into his affairs. As of last week, he is back as Executive Chairman. After challenging White’s return to the company to no avail, the directors had to quit.
Montgomery is right to say that "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 shareholders" (The Oz, March 1-2, 2005, p. 28). It seems the only solution these directors had was to resign. Is this the right governance structure for a multi-billion-dollar ASX-listed company?
The intuitive answer seems to be no. One of the essential duties of the board of directors is to uphold the corporate governance principles that it has laid down. This protects the shareholders as a whole, not just the controlling majority. If the only solution is for a director to resign, it seems that the checks and balances that are the heart of a functioning board are weak. So, what is the problem?
Montgomery is right when he says, "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." Indeed, Australia doesn’t permit dual-class capital like some other foreign jurisdictions. But the issue was publicly debated way back in 1993 when Rupert Murdoch took a differential voting system to the ASX for his News Corp. After submissions, the ASX decided not to introduce the system, arguing that single-class capital had served Australian companies and investors well and they were not going to change just for Murdoch.
But the fact is that, with enough control, management of an Australian-listed company can act as if the capital were dual-class, so long as the founder holds all the cards (i.e., shares). Corporate governance be damned. If the board doesn’t like it, they can go. On the other hand, Richard White, through his talent, drive, ambition, and guile, has made a lot of investors rich with WiseTech. If the man wants to provide business advice for sex, that might have nothing to do with the share price.
But unfortunately, it does. The media spectacle around White has cost investors money. As Montgomery says, if you had invested $100K on Feb 7, you would now only have $75K. This has nothing to do with the numbers, presumably—just with the intangible reputation of the founder.
So, what is to be done? A dual-class common stock system in Australia is unlikely. So, the only solution is to have good corporate governance despite the possibility of misbehaving founders. It is a truth universally acknowledged that money and power drive people to do things they might not have done without money and power. Entrenching good corporate governance into the organisation despite the dominance of the founder is essential.
Should the possibility of founder risk go on the register? Well, maybe not in writing, but it should be on the radar of all directors who agree to join one-share, one-vote boards and who have a fiduciary duty not just to one, but to all shareholders of the company. Certainly succession planning should be on there. As Montgomery says in his opinion: "While recognising the value of a founder’s vision, companies should implement board operating mechanisms that ensure influence can’t override good governance practices."
The solution seems to be taking account of founder risk and mitigating it, whatever that may look like. After all, the point of a board—and of governance generally—is to control the way power is exercised in the company. If the board can't control the founder, it seems a little pointless.
Michael Austin is the founder of Horizon Governance – a professional services firm specialising in corporate governance and company secretary services.