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Should a founder-CEO’s term be limited? Here’s what one study reveals

Posted by Shivali Anand

March 15, 2022    |     4-minute read (694 words)

Jack Dorsey's surprise departure as Twitter CEO in November 2021 caused quite a stir, especially after his hard-won success over an activist investor who tried to oust him a year earlier. Some commentators questioned whether Dorsey's departure heralds a new age in which founders choose to leave their companies when they achieve a particular degree of maturity rather than staying for decades or waiting to be replaced.

According to a Harvard Business Review study, the ideal shelf life of founder-CEOs is likely shorter than most people think. The study’s authors write that while founders play a vital role in creating and growing new businesses, their worth diminishes when companies evolve beyond the IPO stage. The authors recommend that founder-CEOs make plans to cede control to someone better suited to oversee the company after the IPO. 

Founder-CEOs who overstayed their welcome

Uber's Travis Kalanick and WeWork's Adam Neumann were ousted following high-profile blunders. Similarly, 18 months after Groupon went public, founder-CEO Andrew Mason was fired and the company's stock price went up 4%.

Successful founder-CEOs who stepped down voluntarily

Reshma Saujani, founder of Girls Who Code, resigned as CEO after concluding her departure was vital to keep the organization fresh. Meanwhile, Rick Alden, the CEO of Skullcandy, departed before the company's IPO to focus on his other business initiatives. Kendra Scott stepped down as CEO after successfully managing her namesake jewelry company through the retail disruption created by the pandemic.

Founder-CEOs with a long track record of success

Amazon’s Jeff Bezos of Amazon, FedEx’s Frederick Smith of FedEx and Regeneron Pharmaceuticals’ Len Schleifer are three founder-CEOs who have remained in charge of their companies for more than 20 years after their IPOs. Under their leadership, the value of each of those three enterprises has increased considerably.

Given the mixed results of founder-CEOs, HBR researchers conducted a study to investigate the role of founders in generating value for public companies over time by measuring the influence of founder leadership on organizations over time.

The Harvard Business Review study

The link between founder-CEOs and the company's financial performance was investigated through several analyses.

Dataset

The researchers examined a dataset of over 2,000 public companies, roughly half of which were managed by founder-CEOs at the time of collection, including stock performance, valuations and financial accounting indicators like return on assets and Tobin's Q.

The most important discoveries

According to the first findings of the study, having a founder as CEO is connected with a nearly 10% higher valuation at IPO. Still, the value of having a founder in the top seat rapidly drops afterward.

According to the research, the value produced by a founder-CEO declines to virtually zero roughly three years after a company goes public. At this time, they begin detracting from the company's worth.

Implications of significance

According to the findings, founder leadership is unlikely to be advantageous later in an organization's life, such as after an IPO. As a business grows more complicated, a change in leadership style and capabilities is likely to be required.

When is it a good idea to have a founder-CEO?

Nobody is more invested in a company's success than its founder. Employees, investors and the ecosystem all profit when the founder succeeds.

The early years of an organization's development and the IPO are when founders provide the most value as CEO. This suggests that venture capitalists, who usually invest in a company's early stages and cash out shortly after the IPO, would benefit from a founder-friendly strategy.

At the same time, the fact that post-IPO performance is poorer among founder-led firms implies that investors wishing to invest after a company has gone public should take a less founder-friendly strategy. Further, encouraging founder-CEOs to quit before they become a single point of failure might benefit investors, board members and executive teams alike.

In essence, the founder's creativity and big ideas are critical for the company's early phases, but these are entirely different abilities from those required to govern a massive corporation. While some great founder-CEOs do exist, they are the anomaly, as Yeshiva University professor Noam Wasserman points out in his widely recognized book, "The Founder's Dilemma."

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