E X H I B I T 1 5 Before and after Founder CEO Departs, Average Annualized Excess Return
Other significant factors include U.S. size (20.43%), Consumer Staples ( − 8.07%), Consumer Discretion (8.85%), U.S. value ( − 6.53%), volatility ( − 5.95%), and leverage ( − 5.49%). 58 These results are very compelling and, to many investors and academics, will likely be very surprising. We surmise from this analysis that the founder-CEO factor is not only a significant factor to consider for inclusion but, during our time period of study, is the most significant factor for evaluating the excess return. Although this analysis cannot address prior time periods, or necessarily predict the benefits for future time periods, we believe it would be prudent for academic scholars to, at minimum, include the founder- CEO factor for analysis in future studies. 59
(7.90% for the 5-year period and 8.26% for the 10-year period). By contrast, once the founder CEO leaves, the annualized excess return drops to 1.73% and 0.88% for the 5-year and 10-year periods, respectively. Notably, in the latter case, more than one-half of the five-year excess return (after CEO leaves) can be attributed to a single outlier situation. The differential between the period including the founder CEO and the period without the founder CEO is approximately 7% per year (excess return). 61 These results are striking and provide fur- ther support that a founder CEO makes an important difference. There are essentially two different paths that a fund manager might pursue in building a U.S. large- cap smart beta portfolio with the founder-CEO index: 1. Buy the founder-CEO index and replace part (or all) of a U.S. large-cap benchmark index or ETF. The fund manager can create a smart beta portfolio by increasing the weights of founder CEOs that are likely present in an existing index or ETF basket. 2. Build a portfolio starting with the founder-CEO index and add securities to help complete sectors that are underrepresented by the founder-CEO index. Building the Smart Beta Portfolio, One CEO-Founder Index Factor at a Time
Does a Founder-CEO Make a Difference? How Do Companies Perform after Departure?
A seemingly obvious question to this research is the effect had on a company after a founder-CEO departs from his or her firm. 60 Exhibit 15 provides an assess- ment for 5-year and 10-year periods before and after departure. In total, we have 129 companies with 5-year performance and 38 companies with 10-year perfor- mance. The results for both periods are very similar and significant. In the 5 or 10 years prior to departure, the founder-CEO company produces an annualized excess return (over market benchmark) of approximately 8%
W INTER 2017
T HE J OURNAL OF I NDEX I NVESTING
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