Amen of the Week
“…there are certain structural advantages that founders may have that can make their jobs easier than those of non-founder CEOs… The social capital and moral authority that comes from being the founder and having built many of the company’s key products means that on balance people trust you more and give you the benefit of the doubt more when you make tough calls. Fewer people complain and take your time to manage. Fewer people quit and slow your execution. Everything is easier with social capital.”
-Mark Zuckerberg, founder and CEO of Facebook
(from recent comments to a Facebook post)
Founders make the best CEO’s. This may sound like common sense to most of you, yet many MBA types believe just the opposite. Founders make great founders. That much they concede. It is when a company reaches critical mass, they argue, that it’s time to bring in a professional CEO.
Suppose you were given the choice of investing a meaningful portion of your life’s savings in one of two companies. One is run by the founder of the business; the other is run by an executive with a strong history of execution. (Assume all else is equal between the companies.)
Most of us would likely choose to work for (or invest in) the company run by a founder -- even if he had some warts. We’d choose this over the company run by the professional CEO. Why is this? Instinctively, most of us would believe that the founder would bring something to the table that the professional would not: heart and soul.
I believe that people have souls. Companies are merely an association of people, and so by definition, companies have a collective soul. Over time a soul can grow stronger or weaker. It all depends on how it’s nurtured. The founder – who gave birth to the company – is often best equipped to nurture, lead, and inspire the people who comprise the company.
The professional CEO, however, is a foster parent. Even with the best of intentions and ultra-smart strategic plans, they often lack that deep connection with employees and customers. Anecdotes abound of great companies that fell on hard times after the founder relinquished the reins to an outsider, only to recover to new heights once the founder stepped back in and retook control. Charles Schwab and Howard Schultz (Starbucks) are two such cases that quickly come to mind.
Academic research supports the notion that founders make the best CEO’s, and their stock prices benefit as a result. Rüdiger Fahlenbrach, PhD, has done some of the most interesting work that I’ve found on this subject. His 2009 paper notes that “founder-CEO firms not only have a higher valuation but also better stock market performance, and that they make different investment decisions... Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993 to 2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually.” You can find more information on Dr. Fahlenbrach’s paper and some other interesting research here on Fielder’s website.
Yours in the Field,
Frank Byrd, CFA
* Fahlenbrach, Rüdiger. “Founder-Ceos, Investment Decisions, and Stock Market Performance.” 2007 (revised 2009)
Disclaimer: To be clear, Fielder does NOT have an opinion on the investment merits of any specific founder-run stocks, including the ones mentioned by name in this report.
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