Billionaire entrepreneurs can make for bold businesses but often with fewer checks and balances
- Written by Claire Wright, Lecturer, University of Technology Sydney, University of Technology Sydney
Richard White, head of WiseTech Global, is the latest of a small number of charismatic business founders to have captured the public and corporate imagination.
The businessman is synonymous with one of Australia’s most successful technology companies, worth more than A$32 billion[1]. He has a public image of being a prodigy entrepreneur[2], committed to innovative software for the logistics industry.
Mixing pleasure with business
Last October, White stepped down as chief executive amid a series of allegations[3] about his personal and professional life.
While WiseTech’s board held an independent investigation[4], White was retained as a full-time consultant. The review later cleared him of wrongdoing.
But last week, further allegations threw the board into disarray. Trading was halted and four independent directors – including the chair – resigned citing “intractable differences[5]” and “differing views around the ongoing role of … Richard White”.
Allegations against White[6] included financially supporting two women in return for sexual favours. He was also accused of selling millions of dollars worth of shares during a blackout period. White has strongly denied any wrongdoing.
Claims like this would normally end a corporate leader’s career. But by Wednesday, White had been promoted. He currently holds 37% of WiseTech stock, and is the executive chair.
Although the market is divided, most industry experts are relieved the founder will retain control. Many believe White to be the only person who can successfully run[7] the company.
WiseTech’s challenge now lies with ensuring appropriate governance, given White’s ownership and management of the company and his role on the board.
Normally, company directors protect shareholders by independently overseeing management. While executive directors like White are common, they are usually in the minority. Close ties between the board and management can present a conflict of interest for shareholders.
Charismatic business moguls
Charismatic entrepreneurs like Richard White are unusual. They are often found in family companies[9], such as those headed by Rupert Murdoch (News Corp), the late Kerry Packer (Consolidated Press) and Gina Rinehart (Hancock Prospecting).
Although such entrepreneurs help maintain a long-term, intergenerational vision for a company, their unrestricted power has presented some unique challenges.
There has often been opaque succession planning[10], with the family head remaining at the helm long after a standard retirement age[11].
This has fostered bitter rivalries[12] among descendants. The current Murdoch succession[13] feud is such an example.
Corporate raiders and the 1980s
The 1980s corporate environment reminds us of the risks WiseTech faces by integrating its ownership, management and governance functions. The decade was typified by high-profile “corporate raiders[14]”, who created businesses by acquiring minority but controlling interest (more than 15%, less than 50%) in an array of unrelated companies.
Acquiring companies with dated management, underperforming assets and undervalued stock, raiders argued shareholders would benefit through transferable management skills[15] and unrelated diversification.
For example, in January 1986, Ron Brierley’s Industrial Equity bid for a minority holding of North Broken Hill. It argued that demerging[16] the income streams of silver, lead and zinc mining would eliminate superfluous costs and deliver a more flexible risk profile.
Following a takeover, corporate raiders appointed insiders to the board of the target company, potentially removing a level of accountability. They replaced genuinely independent directors[17] with executives from elsewhere in the business. The ownership structure meant existing directors could do little to prevent this.
Raising the risk levels
Once they were appointed, raiders reportedly “harangued[18]” remaining independent board members to support risky activities that redirected resources to the dominant company.
With their critical mass of board votes, most raiders ignored promised operational improvements. Instead, profit was increasingly derived from share trades and cross-dividends[19].
For example, after AdSteam, the logistics and industrial conglomerate, took over David Jones Ltd, half the dividend paid by the retailer in a given year went to AdSteam, as investment income. This income then allowed AdSteam to pay a higher dividend[20] to their major shareholder, David Jones.
Although the market rewarded this in the short term, it increased the companies’ debt load, and diminished their capacity to operate their core businesses.
Lack of accountability
The public image of corporate raiders in the 80s encouraged passivity from shareholders, financial media and auditors.
Journalists actively supported corporate raiding. Business Review Weekly argued the Elders-IXL merger was “a victory for the smart, fast-moving, MBA-style business breed over the entrenched traditionalist[21]”.
The public mythology of corporate raiders continued, even after the group structures began to falter in the late 80s.
When Bond Corp was questioned about its expansionary operations following the October 1987 crash, reporters were satisfied with vague statements about the company’s “solid cash flow[22]” to see it through difficult times.
However, AdSteam was ultimately described as a “humiliation[24]” for the accounting profession, with the untangling of records beyond virtually everyone.
As late as 1989 the media acknowledged the “complexity[25]” of Adsteam’s intersecting shareholding, yet believed the leadership team’s accounting was sound.
Conflicts of interest were catastrophic for diversified business groups. The October 1987 global stock market crash[26] prompted foreign banks to withdraw from Australia, local banks to tighten credit and higher interest rates[27].
This triggered a collapse in stock prices. Investment income, once the source of extraordinary profits, was soon responsible for the downward spiral of balance sheets. Bond announced a $1 billion[28] loss in October 1989, the largest in Australia’s history. Elders-IXL[29] was restructured as the Foster’s Group in 1990. Bell Group and AdSteam collapsed in 1991[30].
What now for WiseTech?
WiseTech appears to have returned to business as usual. White’s image as the only person capable of running the business remains strong. However, this case highlights the potential risks associated with a person’s position as major shareholder and executive chair.
References
- ^ A$32 billion (www.abc.net.au)
- ^ prodigy entrepreneur (www.forbes.com.au)
- ^ allegations (www.abc.net.au)
- ^ independent investigation (cdn-api.markitdigital.com)
- ^ intractable differences (www.wisetechglobal.com)
- ^ against White (www.afr.com)
- ^ successfully run (www.afr.com)
- ^ Brendan Esposito/AAP (photos.aap.com.au)
- ^ family companies (onlinelibrary.wiley.com)
- ^ succession planning (www.afr.com)
- ^ retirement age (www.abc.net.au)
- ^ bitter rivalries (www.vanityfair.com)
- ^ Murdoch succession (www.smh.com.au)
- ^ corporate raiders (onlinelibrary.wiley.com)
- ^ management skills (www.amazon.com.au)
- ^ demerging (trove.nla.gov.au)
- ^ independent directors (onlinelibrary.wiley.com)
- ^ harangued (www.smh.com.au)
- ^ cross-dividends (onlinelibrary.wiley.com)
- ^ higher dividend (www.amazon.com.au)
- ^ entrenched traditionalist (www.blackincbooks.com.au)
- ^ solid cash flow (link.springer.com)
- ^ Rick Rycroft/AAP (photos.aap.com.au)
- ^ humiliation (www.amazon.com.au)
- ^ complexity (trove.nla.gov.au)
- ^ stock market crash (www.theage.com.au)
- ^ interest rates (onlinelibrary.wiley.com)
- ^ $1 billion (www.smh.com.au)
- ^ Elders-IXL (www.tandfonline.com)
- ^ collapsed in 1991 (onlinelibrary.wiley.com)
Authors: Claire Wright, Lecturer, University of Technology Sydney, University of Technology Sydney
