20 In addition to the academic literature, we note that some investment firms, such as EntrepreneurShares, LLC, make their investment methodology an approach to investing in what they deem to be publicly traded entrepreneurial com- panies. A few of the factors that they cite could be, in part, attributed to the founder-CEO variable. 21 A founder-CEO index has recently been launched (ticker: CEOFTR). It is compiled and distributed by Thompson-Reuters (in real time) and is available on Bloom- berg and Yahoo Finance, among other sites. The historical record of this index corresponds to the time period of June 2005 to the present. 22 The notion of a two-asset portfolio composed of an underlying basket of securities with specified risk–return attributes becomes a very elegant solution for investment managers and consultants. In this scenario, a CIO could choose to incorporate a founder-CEO index to enhance the returns of an underlying S&P 500 basket and set the tracking error of the overall portfolio to fall within a pre- determined set of parameters. Should the CIO decide to incorporate a tactical approach, he or she could reduce the founder-CEO index when market conditions do not favor a growth-oriented sector–heavy (Tech/Healthcare/Consumer Discretionary) bias. This would also be an example of a core satellite approach. 23 This concept is discussed at length in the publication by Winther and Steenstrup [2016]. 24 We suggest two indexes, S&P 500 and Russell 1000 Growth; the former is a well-known benchmark for U.S. large-cap securities, and the latter may have a stronger cor- relation to the underlying founder-CEO index. As we will show later in the article, the strong growth orientation to the founder-CEO index provides a potentially better match with the Russell 1000 Growth Index. Consequently, for purposes of thoroughness, we choose to use both. 25 The ability to correctly identify founder CEOs is not as simple as it may initially appear. Some of the leading data- bases, such as Bloomberg and Capital IQ, frequently offer inconsistent characterizations of individuals. Moreover, due to the manner in which historical data are stored, an indi- vidual frequently is only listed while in a current manage- ment position. Consequently, uncovering original founders is a painstaking task requiring a long, arduous process of researching each and every company. In uncovering founder CEOs, we note the possibility of Type I (false positive) and Type II (false negative) errors. The following discussion is relevant in our discovery of founder CEOs: • Type I error: An executive is incorrectly listed as a founder (in Bloomberg, Capital IQ, or other data- base sources). In the case of TJX Companies, Inc.,
Ben Cammarata is listed as founder in Bloomberg. However, according to the TJX Companies web- site, “The TJX Companies, Inc. traces its history back to 1919 when brothers Max and Morris Feld- berg founded the New England Trading Company in Boston, MA. The Company started as a ladies’ hosiery business and grew into a chain of women’s apparel stores. The business evolved into a dis- count department store chain; in the mid-1950s, the Feldberg family rebranded it as Zayre Corpora- tion.” Despite Cammarata’s great involvement in Zayre’s mid-1970s restructuring, which resulted in the TJX Companies, the company’s history extends long before Cammarata’s time. Common reasons for Type I error include spinoffs, merger/ acquisitions, restructures, and rebranding. Type I errors are more common than Type II errors. The most common explanations are usually a result of either complex corporate restructures/rebranding with limited or vague information. Some exam- ples are divisional spinoffs that incorrectly list the executive involved in the spinoff as the founder of the new company; however, it is important to note that although an executive of this nature is not defined as a founder, this does not mean that they are not a great entrepreneur with admirable skill and leadership. • Type II error: An executive is incorrectly not listed as a founder (in Bloomberg, CapIQ, other database sources). In the case of Apartment Investment & Management Co. (Aimco), Terry Considine is incorrectly not identified as founder in Bloom- berg and CapIQ. However, on Aimco’s web- site, the company timeline begins in 1975 when Terry Considine formed the Considine Company. Through a series of name changes, acquisitions, and mergers, the former company transformed into Aimco. Terry Considine had been the key visionary behind the company’s evolution and, as a result, falls under the definition of a founder (in this article and the founder-CEO index). Common reasons for Type II error include limited or vague information on a company, a complex company timeline, bankrupt/delisted companies, and mergers/acquisitions. Type II errors are more difficult to find compared to Type I errors; how- ever, discovering and correcting Type II errors is a critical component when constructing the
L EADERSHIP M ATTERS : C RAFTING A S MART B ETA P ORTFOLIO WITH A F OUNDER -CEO T WIST
W INTER 2017
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