Is WiseTech the next victim of founder syndrome? – Mark Gardner

Investors, fund managers and analysts generally agree that a founder-led business is a big deal when it comes to long-term wealth winners. But what do you do when a founding CEO is embroiled in scandal?

Historically, any form of CEO succession makes investors nervous, but when a founding CEO is embroiled in scandal, whether personal or company-related, the repercussions can be severe, especially for shareholders.

Statistically speaking, the long-term average impact of this move on stock prices is negligible and usually not as bad as the initial knee-jerk reaction. That said, in individual cases, the results are catastrophic.

WiseTech Global (ASX: WTC)Founder and CEO Richard White has recently been the subject of a personal court case made public by Federal Court documents. The documents present a vivid example of the challenges of “founder syndrome” and its potential impact on share prices.

While I wholeheartedly believe in “innocent until proven guilty” and have no opinion on the situation, investors need to rationally evaluate their investments and understand the potential stock price consequences when these situations occur, especially after such a meteoric rise in the company’s valuation. .

The WiseTech situation

Richard White, the visionary behind WiseTech Global, has been a driving force behind the company’s growth since its inception. However, recent allegations have cast a shadow over his leadership.

While these allegations are unproven at this stage, questions have been raised about the public’s handling of the situation so far, particularly as it centers around a $90,000 dispute (a pittance for the man who is worth of 11 billion dollars). While this isn’t technically a WiseTech problem, the problem with founding CEOs who have rockstar personalities is that the man and the company are one.

To clarify, the purpose of this article is not to pass judgment, especially when such allegations are unproven. But as an investor, the question is asked. Why is a $90,000 case being played out publicly at the risk of shareholder confidence and potentially forcing the board to face difficult decisions about its future with the company?

The founder syndrome effect

Founder syndrome is not uncommon in the meteoric rise of successful companies and occurs when a company’s original leader maintains an outsized influence on decision-making even as the organization evolves.

In WiseTech’s case, having ASX ‘pin-up boy’ status has been a blessing with the company up 2,600%+ since it floated in 2015-16. Their visionary leadership, innovative product development and business acumen have made WiseTech a market favorite on the ASX. But many investors, especially Magellan’s owners, could be watching this scandal unfold very closely. After all, this story is by no means unprecedented.

Historical precedents

Some examples of the impact on company valuations when founder-led companies lose their founding CEOs:

• Apple (NASDAQ: AAPL): When Steve Jobs stepped down as CEO of Apple in August 2011 due to health reasons, the company’s stock price initially fell 5%. Although this initial decline was relatively modest, Apple’s growth rate slowed in the years following Jobs’ departure. Under his successor Tim Cook, Apple faced challenges to maintain the same level of innovation and excitement about the product that characterized the Jobs era.
• Microsoft (NASDAQ: MSFT): While Bill Gates didn’t leave Microsoft entirely, his transition from CEO to chief software architect in 2000 marked a significant change. Under his successor Steve Ballmer, Microsoft’s stock price stagnated for more than a decade. The company struggled to adapt to the mobile revolution and lost ground to competitors such as Apple and Google in key emerging markets.
• WeWork (NYSE: WE): After co-founder Adam Neumann stepped down as CEO in 2019, WeWork’s valuation plummeted from $47 billion to about $10 billion, a high-to-low decline of nearly 80%.
• Magellan (ASX: MFG): When Hamish Douglass experienced a very public fall from grace, Magellan’s share price was significantly affected. Once hailed as a rock star fund manager, Douglass stepped down from his executive duties in early 2022 due to personal issues, initially taking medical leave before formally ending his tenure. This exit, coupled with the fund’s poor performance, saw the fund hit with massive redemptions from large institutional clients and led to a sharp fall in funds under management and in Magellan’s share price. The situation worsened in late 2022 when Douglass unexpectedly sold a large portion of his stake in the company for $118 million, contradicting his earlier assurances and further eroding investor confidence.
• As a result, Magellan’s share price plummeted, losing roughly 68% of its value year over year and saw its market capitalization shrink from $10 billion in July 2020 to less of $2 billion by October 2022.

While these examples do not provide a single average figure, they demonstrate that the departure of a founding CEO can lead to significant declines in company valuations, ranging from moderate declines to declines of 80% or more in extreme cases such as WeWork and Magellan.

The dilemma of the board

WiseTech’s board faces a challenging balancing act:

1. Maintain stability: Retaining White could provide continuity, but risks perpetuating governance problems.
2. Implement the change: Removing White could address governance issues, but could lead to short-term instability.
3. Improve supervision: Strengthening board independence and oversight mechanisms could mitigate the risks associated with founder syndrome.

ESG considerations

Environmental, Social and Governance (ESG) mandated funds may face additional pressure in these situations. These funds usually have strict criteria regarding corporate governance and ethical leadership. A scandal involving a founding CEO could force these funds to divest, which could lead to further declines in share prices.

What should shareholders consider?

For shareholders, the situation presents a complex dilemma, especially in the case of WiseTech, because the business is in good shape and recently had a stellar earnings report. Investors should ask themselves

1. Am I prepared to deal with stock price volatility? The effects of these scandal shorts are usually short-term and in some cases can be a buying opportunity. But after 2600% in less than 10 years, are you willing to do it?
2. Will it affect long-term performance? The departure of a visionary founder can affect a company’s long-term performance and investor confidence, but it’s not always a company killer. WiseTech has been an easy-to-drive investment, which in many cases means investors and analysts are getting lazy with their research, so it’s a good time to reassess and put a plan in place if things start to spiral.

For us at MPC Markets, we were already on the sell side of this stock. Its attractive valuation and regular strong pullbacks every 15-18 months (on 4 occasions, down 40% on average over the last six years) make the risk/reward not favorable enough for us. That said, it has always been a top “buy the dip” action.

What we must now consider is whether we continue to “buy down” if the current situation develops unfavorably. At the moment, we’re not so sure and will be happy to remain spectators until the situation is resolved.