Founder-CEO firms stock shown better performance

Founder-CEO

Founder-CEO firms do outpace other companies!

Two reports

Research at Purdue University

Many companies where the founder is still the CEO will tend to be safer investments, because the founder knows the business better than the outside CEO, which will directly affect the outcome of the investment. A study by Purdue University found that over the past 15 years, S&P 500 companies whose founders still hold key positions have outperformed companies with 310% higher share prices than companies whose founders have no longer held positions.

Wharton’s Research

According to the study “Founders and CEOs and Stock Market Performance” by Rudiger Fahlenbrach of the Wharton School of Business at the University of Pennsylvania, it is found that companies with founders and CEOs generate higher returns on assets and are also valued by investors. Higher than non-founder-CEO companies. The detailed results are as follows:

  • Eleven percent of the largest 2,327 publicly traded companies in the U.S. are led by founding CEOs.
  • Annual returns on investments in founder-CEO companies from 1993 to 2002. Found that a value-weighted investing strategy that buys founder-CEO companies can generate excess returns of 10.7% per year.
  • Annual returns on investments in founder-CEO companies from 1993 to 2002. Found that an equal-weight investment strategy of buying the founder-CEO company yielded an excess return of 8.3% per year.
  • After adjusting for various firm characteristics, CEO characteristics, and affiliation across industries, the excess return was 4.4% per annum.

Typical Examples

Tech companies are a good example. Almost all tech companies are run by founders, and they operate in a very competitive environment. Apple (ticker: AAPL) is an exception, but the fate of Microsoft (ticker: MSFT ) is an excellent example of how vulnerable a company can be in an industry full of change without a founder at the helm.

When Bill Gates retired in 2000 to focus on philanthropy, the company’s stock price ranged for 16 years until Satya Nadella’s pivot to cloud computing brought the company back to life. come over.

Even Apple would not have grown to its current size without the leadership of Jobs. The fate of the company in the years he was ousted from Apple (before he was reinstated) is a prime example of the dangers of having an outside CEO run the company.

Strategy adopted

The founder-CEO’s company has very different systems than the successor CEO’s company. Such companies have higher financial figures and performance, and of course they will enjoy higher corporate valuations and stock prices.

In general, companies whose founders are CEOs invest more in R&D, have higher capital expenditures, and conduct more targeted mergers and acquisitions; these are all very positive for revenue and long-term growth of the company .

But why founder?

But why does it have to be the founder and CEO to do it? to complete the successful strategy above? Possible factors include:

  • The founder himself is a major shareholder, so he will work harder to keep his pockets tight, hoping to increase his wealth.
  • Because the founder is usually the major shareholder of the company, especially in the technology industry in recent years, through the setting of dual shareholding, he can even easily own more than half of the voting rights. The result is that all interference and unfavorable obstacles can be eliminated, and most of the plans can be smoothly promoted. Of course, the probability of success is much higher.
  • The founders usually have a very good understanding of the business of the company. Even if they return to work after a few years, they can still have a certain degree of understanding and get started faster than professional managers.
  • Even if neither of the above conditions holds true, the founders still have some influence over the businesses they start. The intangible influence on the company will be much smoother when carrying out key business promotion.
Founder-CEO

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