Billabong misfire: When founders become problems
Tuesday, June 26, 2012/
In an admission that will give little comfort to the company’s minority shareholders, Billibong founder Gordon Merchant, who owns more than 15% of the surfwear company and remains on the board, said he had made a mistake by pushing the board to reject a $3.30 a share bid from private equity firm TPG Capital. He now says he’s open to other offers, though, of course, they’ll be a lot lower than $3.30 a share.
His mea culpa came as the company’s share price floundered after a capital raising, down to 96 cents.
In a comment particularly infuriating to shareholders, such as second-largest shareholder Perennial Value, Merchant says he made the decision “as a shareholder, not as a director”. Many have called for him to stand down from the board and cease influencing the company, leaving new CEO Launa Inman to fix what she can after current chair Ted Kunkel retires at the next AGM in October this year.
Merchant’s case isn’t unique. Bad calls by company founders who are out of their depth and rapidly losing perspective are a common feature of corporate collapses. For example, founder Ray Williams was pivotal in the 2001 collapse of HIH Insurance, the largest corporate collapse in Australia’s history, while Kenneth Lay was founder, chairman and CEO at American energy company Enron Corporation until its collapse in 2001.
Understandably, founders can hold huge sway over a company’s direction. If no checks or balances exist to this as a business grows, it becomes a corporate governance issue for investors and others in the business. Which begs the question, once companies reach a certain size, should the company founder be encouraged (or forced) to take their money and leave?
Geoff Brooke, who as a venture capital investor deals with company founders all the time, isn’t so sure. He says there are good points to having founders remain involved in a business.
Brooke is the managing director of GBS Venture Partners, a bioscience venture capital firm that invests in companies in their early stages where they are still developing their product. Many of the companies it invests in have company founders still at their head.
“The founders are usually charismatic, innovative, have a thought-leading brain and personality, and usually will move mountains to get their idea or technology, their baby, to be successful,” he says.
“The negatives arise when the founder’s experiences, and personality, are not consistent with what the business becomes down the track. It’s quite common for these two things to collide, where the founders personality and experience doesn’t fit with where the company is. It’s obvious when it’s the case.”
“Sometimes the founder doesn’t want to give up the CEO reigns, but they have never been in a business that sells a product, or run a 50-person business that exports around the world.”
What does Brooke do when he thinks this is the case, but the founder doesn’t want to leave?
“It’s really tough,” he admits. “You can lose a lot of sleep over it.”
“You obviously try by talking to the individual and just discussing the issue. You say why you don’t think it is working. That might continue until you force them out, which is the last thing you want to do. It can be really ugly.”
“Obviously it can become a very emotive issue, which you don’t want because emotion can cloud people’s commercial judgement.”
Sometimes, the solution can be for the founder to go back to doing what they do best. In many of the companies GBS invests in, that means going back to a product development role.
“They might want to go back to being a full-time scientist… or maybe even go off and do that for another company. Sometimes they can stay intimately involved by helping develop the lead products, or develop new products, letting them stay involved but with things that better match their experience base and personality.”
But sometimes it can be hard to take a step back. After all, business founders have strong personalities. They need to have egos, Brookes says, just like successful CEOs need to.
“Otherwise they wouldn’t want to climb the mountains that they want to climb, and wouldn’t get their products or ideas to a successful outcome. It’s a herculean task.”
Brookes says that sometimes, founders who cling on can confound low expectations, and go on to be very successful.
“We’ve done a couple of companies with a founder who was adamant that he should stay involved all the way through. And I must admit that worked out really well.”
The company where GBS made its biggest return (a tenfold increase) has a founder who was there when Brookes and his team entered, and is still there to this day.
“The bottom line is that it’s great to have founders involved for as long as possible,” Brookes concludes. “It can work.”