Aug 222007
Father/Mother Knows Best?
Father/Mother Knows Best?
USA Today had an interesting article today about how founder-led companies perform better than their non-founder-led counterparts, with a 15-year stock price appreciation of 970% vs. the S&P 500 average of 222%. That’s pretty powerful data.
The general reasons cited in the article include
founders having deep industry knowledge…having a powerful presence in the company…having a huge financial stake in the success of the business…not looking for the next job so can take a long-term perspective…being street fighters early on
I think all those are true to some extent. And it’s certainly true, as one of the CEOs interviewed for the article said, that it’s not because founders are smarter or harder working. But to add to the dialog, I think there are two other big reasons founders may be more successful at generating long-term returns for their companies. One is much more tactical than the other.
1. Founders have a deep, emotional connection to the business. For many of us, and certainly for the 15-year-plus variety mentioned in the article, a founder’s company represents his or her life’s work. Whether or not your name is on the door like Michael Dell, as a founder, your personal reputation and in many cases (perhaps in an unhealthy way), your sense of self worth is tied to the success of the business. I’m not suggesting that “hired” CEOs don’t also care about their reputations, but there is something different about the view you have of a business when you started it.
2. Founders have longer tenures. The article didn’t say, but my guess is that for the 15 years analyzed, the average tenure of the founder-led companies was 15 years…and the average for the S&P 500 was something like 5 years. And while 5 years may seem like a long time in this day and age of job hopping, it’s not so long in the scheme of running and building an enterprise. It takes years to learn an industry, years to build relationships with people, and years to influence a culture. Companies that trade out CEOs every few years are by definition going to have less solid and consistent strategies and cultures than those who have more stability at the top, and that must influence long-term value as much as anything else.
I’m sure there are other reasons as well…comment away if you have some to add!
The biggest reason is probably survivorship bias. Companies with publicly available performance data and founders at the helm clearly have the most capable founders out there (or they would have been replaced).
And given that the hit rate on quality CEOs is far less than 100% in the first place…
Another way to word the premise of the article would be “The 63 most successful founders ever have outperformed the S&P 500, while the other 999,937 have not.”
And for some insight into the challenges founders face, I strongly recommend _The Founder Factor_ by Nancy Truitt Pierce for a pretty quick & easy read.
Founders who successfully navigate the obstacles identified by Nancy are bound to be incredibly successful because they understand the business, care about it deeply, AND are able to appropriately adapt to the shifting needs of the organization. As such, they’ll almost certainly outperform other organizations where two out of three is the best that can be expected.