Regnan: What to watch out for when investing in founder-led companies

Founder-led companies have created enormous wealth for shareholders but they also come with challenging risks. Regnan analysts GRACE ZHANG and OSHADEE SIYAGUNA explain

• Risk in founder-led firms
• Robust governance required
• Read Regnan’s full report: Masters of Control
• Find out more about Regnan

STEVE Jobs, Mark Zuckerberg, Rupert Murdoch, Elon Musk – there is a seemingly endless rollcall of visionary founders that have generated extraordinary wealth for shareholders.

But for all the attractions of founder-led companies, concentration of control in a powerful shareholder also carries inherent risk – founders may limit board independence, prioritise their own interests over those of shareholders, or act in a way that damages a company’s culture and reputation.

Recent governance dramas at several ASX-listed companies illustrate how founder influence can pose a challenge for investors.

So, how should investors to think about founder-led companies?

A new study from responsible investing leader Regnan sets out some principles to help manage the delicate balance between harnessing the strength of founders and mitigating their inherent risks.

Fundamentally, Regnan finds success comes down to robust governance frameworks – ensuring independent boards, sunset clauses for dual-class shares, and transparent conflict-of-interest policies.

“Founder-led [companies] are engines of innovation, resilience, and long-term growth, yet their concentrated power structures can pose significant governance risks,” say the report’s authors, Regnan analysts Grace Zhang and Oshadee Siyaguna.

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“By striking the right balance between entrepreneurial freedom and accountability, founder-led, controlled companies can unlock their full potential while fostering trust among all stakeholders.”

Governance risk

Founder-led companies can outperform due to their long-term focus, stable leadership, and commitment to innovation.

A deep alignment between the company’s success and the interests of controlling shareholders allows for strategic consistency and a resilience to help weather economic downturns.

But founder-led companies also come with unique risks.

Regnan’s research finds that chief among these are the potential for boards to be compromised by close ties to founders, a tendency for founders to act as CEO and chair, dual-class voting structures that disadvantage minority shareholders, excessive remuneration, nepotism, and the risk of related-party transactions.

“While controlling shareholding may constitute a factor of influence to stock performance in general, it certainly amplifies governance risks of controlled companies,” say the authors.

Regnan found multiple case studies illustrating governance risks.

Companies with Australian connections came in for particular criticism.

Rupert Murdoch’s News Corporation spent US$674 million buying the Shine Group production company that was 53 per cent-owned by the founder’s daughter, Elisabeth Murdoch, despite misgivings among minority shareholders.

Retailer Kogan.com granted its founders retention-focused options valued at A$70 million and A$46.7 million respectively, despite 42 per cent of shareholders voting against the grant. When ultimately cash-settled, the payout represented 51 per cent of the company’s total cash on hand.

Poker machine maker Aristocrat Leisure agreed to provide its founder, Len Ainsworth, with a new car every three years for the rest of life – and cover all running costs. The long-retired Ainsworth has been quoted suggesting he wants a “Rolls Royce as a final gift”.

Advice for investors

Regnan suggests a series of steps investors can use to protect their interests while still getting access to the potential upside of founder-led companies by proactively addressing governance risk and fostering accountability.

Key recommendations from the report include ensuring board committees retain independence, seeking separate chair and CEO roles, seeking transparent conflict-of-interest policies, and pursuing sunset clauses for dual class share structures.