percentage of sales is higher for founder CEOs than the peer benchmark. 13 Wasserman [2003] discussed how founder CEOs are different from professional CEOs. He noted that professional CEOs are older, have more years of prior work experience, are paid higher salaries, own significantly less of the compa- ny’s equity, and have less control. Dobrev and Barnett [2005] also described the identity of organizational founders as being closely aligned to their organization. In addition, O’Reilly and Chatman [1986] discussed the psychological bonds that link individuals to their organizations. 14 Gao and Jain [2011] provided an excellent overview of the theoretical development and hypotheses regarding why founder-CEO firms are likely to be more productive com- pared to non–founder-CEO firms. Fama and Jensen [1983], Nelson [2003], and Wasserman [2003] suggested that agency costs are lower in founder-run companies (implying founder- led companies are antiagency cost). Aldrich [1979] and Fischer et al. [2004] discussed the importance of a founder CEO during the transition to a public company. Basu, Dimitrova, and Paeglis [2009] noted that a newly public firm generally does not have its own reputation, so it needs to rely more heavily on its founder to gain investor attention. Finally, Gao and Jain [2011] argued that founder CEOs are characterized by a higher need for achievement, stronger psychological attachment to their company, tighter economic ties, larger ownership stakes, longer investment horizon, and higher degree of firm-specific skills. These attributes contribute to the founder CEO’s overall willingness and desire to pursue long-term strategies at the expense of short-term results, with corresponding improvement in post–initial public offering (IPO) performance. However, there is a counterbalance effect in play. Dobrev and Barnett [2005] discussed the increased likelihood of founder CEOs leaving an organization as it grows larger and matures and their comparative skill set diminishes in value as the firm matures. In contrast, they found the opposite effect with professional CEOs. 15 We define founder as the key individual or individuals who are/were with the company at inception or pre-revenue. In many cases, there are discrepancies among databases such as Bloomberg, Capital IQ, and company websites. We searched each company in the Russell 1000 database from the begin- ning of our time period to ensure that each founder held these characteristics. Individuals who transferred from an existing company with a spinoff are not labeled as founders. Notably, individuals who take over an existing enterprise and then recast history by labeling themselves as founders, such as the characterization of Ray Croc in the film “Founders” would not be labeled a founder in our study. We recognize individuals such as Ray Croc as worthy entrepreneurs, but we do not include these individuals in our founder-CEO study. Other research, such as that by Shulman [2010], has
provided an investment model of 15 entrepreneurial charac- teristics and built an index of this grouping. In the identifica- tion of entrepreneurs, the founder-CEO variable is included along with a broader set of individuals in addition to founder CEOs. This research might include individuals such as Ray Croc or people who display unique characteristics resulting in substantial growth and vision but who did not participate at company inception. 16 For example, entrepreneurs may have a different board composition, ownership structure, compensation arrangement, capital structure, growth orientation, R&D perspective, and long-term vision (among other differences) compared to non-entrepreneurs. 17 Shulman and Noyes [2012] discuss the differences between a founder and an entrepreneur. For example, Angelo Mozillo, the founder CEO of Countrywide, was widely viewed as a self-serving inside trader who helped contribute to the 2008 mortgage crisis (he paid a $67.5 million fine to the Securities and Exchange Commission [SEC]). Mr. Mozillo does not have the same business traits as well-known entrepreneurs such as Howard Schultz (Starbucks) and Elon Musk (Tesla). These two successful individuals came in to their organizations early, were visionaries who created wealth for themselves and others, but were not founders. Moreover, Warren Buffet (Berkshire Hathaway) is another unique example of an extremely successful entrepreneur (who was not a founder) who successfully grew an established organiza- tion into something more substantive. 18 We provide detailed analytics later in this article showing how a portfolio of the 30 largest market cap U.S. founder-CEO public companies (rebalanced quarterly), dating from June 2005 through September 2016, significantly outperform a peer group of 632 U.S. large-cap fund strategies provided on the eVestment data basis. The analytics show that the founder-CEO group are among the top 1% of all U.S. large-cap strategies during this time period, based on total returns and excess returns. As our analysis will reveal, the results are not consistent for each time period and vary considerably depending on the industry sector. 19 Gao and Jain [2011] and Fahlenbrach [2009], among others, provided evidence that shareholders of publicly traded founder CEOs perform better than professional CEOs. Gao and Jain examined the five-year post-IPO performance of 1,963 IPOs from 1997–2000. They found that high-tech companies run by founder CEOs were more likely to outper- form professional CEOs (especially when venture capitalists were not involved). Companies in low-technology areas did not outperform during this time period. Fahlenbrach showed that founder-CEO firms outperformed professional-CEO firms by 8% per year and suggested that long-term invest- ments in R&D, capital expenditure, and other initiatives were largely responsible.
W INTER 2017
T HE J OURNAL OF I NDEX I NVESTING
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