An independent board would have been asking whether or not the founders, after 43 years in the business, still have the energy and capacity to execute the Rip Curl’s business strategy.
David Knowles, a partner with accounting firm, Pitcher Partners, says this can be a typical private company mistake. “The board needs to ask, given our business plan, have we got the best team, or are we building a business plan around the people we have got?”
The tendency for founders to stay too long is the “classic story of private business”, says Knowles. “And an individual, or individuals, can get a business so far. It might be too hard at $1 million, or too hard at $50 or $60 million. Business gets to the point where it needs fresh eyes, and fresh leadership.”
Doug Dow, associate professor of business strategy at Melbourne Business School, says a 43-year stint at any company suggests the founders are too emotionally attached.
Not planning for the needs of major shareholders
Remarkably, considering the dominance of major shareholders on the board, the board has failed to plan for the needs of its major shareholders!
It’s a key element of planning in all boards that include venture capital and private equity investors, says Ben Gust, investment director of GBS Venture Partners. Gust, who is not commenting specifically on Rip Curl, says: “The key is for the board to stay in touch with all of its major shareholders, what their incentives and goals are, and making sure you have an alignment of interests.”
The Rip Curl founders, Warbrick and Singer, and fellow director Payot, are nearing retirement age, and an independent board would have been planning for an exit that would have seen them step away in an orderly process with a substantial sum of cash.
Lack of diversity in ownership
Because the founders want to exit the business, Rip Curl is being sold holus bolus. A better plan would have seen them sell down their shareholding over time. “Having a small number of shareholders magnifies the risk of being forced to sell, and a large number protects from that risk,” says Gust, again not commenting on Rip Curl specifically.
Without new shareholders, the company may also lack capital to execute a necessary turnaround in the direction of the business.
Founders deserting the ship
When founders sell large chunks of their company, it unnerves other shareholders: can the founders see a future when the company is less valuable? That is why most founders agree to hang onto their holdings for a set number of years when a company lists on a stock exchange.
When founders leave completely (and sell), new and remaining shareholders face higher risk. For one thing, it tests the company’s succession strategy: has it managed to transfer the founder’s intellectual property and zeal into the DNA of the company they are leaving?
Simply because the founders are leaving, the sale price of Rip Curl (estimated at between $300 million and $4 million) will be lower.
Missing the moment, and copping it sweet
Baby boomers the world over are facing the problems that Rip Curl founders, says Knowles from Pitcher Partners. “At the onset of the GFC, people got a triple-whammy: business values started to plummet, property values fell and the share market fell. Baby boomers were sitting pretty when everything was sweet and they haven’t sold. They have said we will ride this out.
“It is only in the last three to six months people have been saying, ‘This is the new normal’. Maybe you do have to sell.”
In some cases, leaders will have to sell despite a lack of preparation or a good market. As Dow says, the board needs to compare the effect of selling in a low market against selling the assets in the case of a total collapse. He says: “It really depends on the board’s judgment of how likely the business is to tank completely.”
