Is WiseTech the next victim of Founder Syndrome?

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

Historically, any form of CEO succession gives investors nerves, but when a founding CEO becomes embroiled in a scandal, be it personal or business-related, the repercussions can be severe, particularly for shareholders. 

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

WiseTech Global (ASX: WTC)'s founder-CEO Richard White has been the recent subject of a personal court case made public by Federal Court documents. The documents present a live 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 assess their investments rationally and understand the potential consequences on the share price when these situations occur, especially after such a meteoric rise in the company valuation.

The WiseTech Situation

Richard White, the visionary behind WiseTech Global, has been a driving force in 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 emerged about the public handling of the situation so far, particularly as it centres around a $90,000 dispute (pittance for the man reportedly worth $11 billion). While this is not technically a WiseTech problem, the problem with founding CEOs with rockstar personalities is that the man and the company are one.

To clarify, this article’s purpose is not to cast any judgment, especially when these allegations are unproven. But as an investor, the question is being asked. Why is a $90,000 case being played out publicly at the risk of shareholder confidence and potentially forcing the board to confront difficult decisions regarding his future with the company?

The Founder Syndrome Effect

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

In WiseTech's case, having the ASX’s “pin-up boy” status has been a blessing to the tune of 2,600%+ since the company floated in 2015-2016. White's visionary leadership, innovative product development, and business acumen have made WiseTech one of the ASX’s most favoured market darlings. But many investors, particularly those who owned Magellan, could be watching how this scandal develops very closely. After all, this story is by no means without precedent.

Historical Precedents

Some examples of the impact on company valuations when founder-led businesses 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 dipped by about 5%. Although this initial drop was relatively modest, Apple's growth rate slowed in the years following Jobs' departure. Under his successor Tim Cook, Apple faced challenges in maintaining the same level of innovation and product excitement that characterised 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 shift. Under his successor Steve Ballmer, Microsoft's stock price stagnated for over a decade. The company struggled to adapt to the mobile revolution and lost ground to competitors like 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 around $10 billion, a peak-to-trough decline of nearly 80%.
• Magellan (ASX: MFG): When Hamish Douglass experienced a dramatic and public fall from grace, Magellan’s share price was significantly impacted. Once hailed as a rock star fund manager, Douglass stepped down from his executive roles in early 2022 due to personal issues, initially taking medical leave before formally ending his tenure. This departure, coupled with poor fund performance, saw the fund hit with mass redemptions from large institutional clients and led to a sharp decline in Magellan's funds under management and 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 approximately 68% of its value year-over-year and seeing its market capitalisation shrink from $10 billion in July 2020 to below $2 billion by October 2022.

While these examples don't provide a single average figure, they demonstrate that the departure of a founding CEO can lead to significant decreases in company valuations, ranging from moderate declines to drops of 80% or more in extreme cases like WeWork and Magellan.

The board's dilemma

WiseTech's board faces a challenging balancing act:

1. Maintain Stability: Retaining White could provide continuity but risks perpetuating governance issues.
2. Implement Change: Removing White might address governance concerns but could lead to short-term instability.
3. Enhance Oversight: Strengthening board independence and oversight mechanisms could mitigate risks associated with founder syndrome.

ESG Considerations

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

What should shareholders consider?

For shareholders, the situation presents a complex dilemma, particularly in WiseTech’s case, because the business is in good shape and recently has a stellar earnings report. Investors should ask themselves;

1. Am I willing to handle the share price volatility? The effects of these shorts of scandals are often short-term, and in some cases can be a buying opportunity. But after 2600% in under 10 years, are you willing to ride it out?
2. Will it affect long-term performance? The departure of a visionary founder can impact long-term company performance and investor confidence, but it isn’t always a company killer. WiseTech has been an easy investment to ride, which in many cases means investors and analysts get lazy with their research, so it is a good time to reassess and set a plan if things start to spiral.

At MPC Markets, we were already on the sell side for this stock. Its eye-watering valuation and regular heavy pullbacks every 15-18 months (on 4 occasions, it has dropped 40% on average over the last six years) mean the risk/reward isn't favourable enough for us. Having said this, it has always been one of the top "buy the dip" stocks. 

The thing we are now having to consider is, do we continue to "buy on the dip" if the current situation unfolds unfavourably. For now, we aren't so sure and will happily remain spectators until the situation is resolved.