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Should founder-CEOs have an expiration date? Research suggests yes

Posted by Kanika Sinha

January 17, 2022

Businessman writing on paper while sitting at an office desk.

Jack Dorsey’s abrupt resignation from his role as Twitter CEO in November 2021 created an uproar, especially after his hard-fought victory when an activist investor attempted to remove him in 2020. Some observers question whether Dorsey’s exit portends a new era in which founders voluntarily step aside once their business reaches a certain level of maturity, rather than sticking around for decades or waiting to be replaced.

Now research from Harvard Business Review suggests that the optimal shelf life of founder-CEOs is likely shorter than many might assume. According to the study’s authors, while founders play an essential role in creating and growing new organizations, their value tends to diminish as firms mature past the IPO stage. Founder-CEOs should plan to hand the reins to someone better equipped to lead the firm post-IPO, the authors write.

Delve deeper

High-profile founder-CEOs who outstayed their welcome

Uber’s Travis Kalanick and WeWork’s Adam Neumann were ousted in the wake of highly publicized missteps. Similarly, Groupon founder-CEO Andrew Mason was removed 18 months after the company went public, and the firm’s stock price immediately jumped 4%.

Successful founder-CEOs with voluntary exits

Girls Who Code founder Reshma Saujani voluntarily stepped down as CEO upon deciding it necessary to ensure the organization remained innovative. Meanwhile, Skullcandy’s Rick Alden resigned before the firm’s IPO to focus on his other entrepreneurial ventures. And after successfully navigating her namesake jewelry brand through the retail transformation wrought by the pandemic, Kendra Scott stepped down as CEO.

Long-tenured founder-CEOs who drove success

Amazon’s Jeff Bezos, FedEx’s Frederick Smith and Regeneron Pharmaceuticals’ Len Schleifer are all founder-CEOs who retained their position as company chief for more than 20 years beyond the IPO stage. The valuation of each of those three companies grew dramatically under their leadership.

Given the varying results exhibited by founder-CEOs, researchers at HBR undertook a study aimed at examining the role of founders in creating value for public firms over time by quantifying the impact of founder leadership on firms in the long term.

The HBR research

A series of analyses were conducted to determine the relationship between founder-CEOs and the firm’s financial performance.

Dataset

The researchers used an expansive dataset that included stock performance, valuations and financial accounting metrics such as return on assets and Tobin’s Q of nearly 2,000 public firms, about half of which were led by founder-CEOs at the time of collection.

Main findings

The study’s preliminary results indicate that founder-CEO leadership is associated with an almost 10% higher company valuation at IPO, but that the value of having a founder in the top seat rapidly declines after that.

Further, the value added by a founder-CEO essentially drops to zero nearly three years after firms go public, at which point they begin detracting from the value of the organization, according to the research.

Key implication

The research suggests founder leadership is not likely to be beneficial later in an organization’s life, post-IPO. This underscores the probable need for a change in leadership style and competencies as a company becomes more complex over time.

When is a founder-CEO a good idea?

Nobody is more vested in the success of a company than its founder. When the founder does well, employees, investors and the ecosystem also benefit.

As CEO, founders tend to add the most value in the early years of a firm’s development and the IPO. This implies that a founder-friendly approach behooves venture capitalists, who typically invest in a firm’s early stages and cash out shortly after the IPO.

At the same time, the finding that post-IPO performance is lower among founder-led organizations suggests investors looking to get in after a firm has gone public should adopt a less founder-friendly approach. Further, investors, board members and executive teams alike could benefit from encouraging founder-CEOs to exit before they become a single point of failure.

Essentially, the founder’s innovation and big ideas are imperative for the company in its early stages, but those skills are very different than those needed to run a large organization. While there may be some successful founder-CEOs, they tend to be exceptions, a point expounded upon by Yeshiva University professor Noam Wasserman in his frequently cited book, “The Founder’s Dilemma.”

Authors

Kanika Sinha

Kanika is an enthusiastic content writer who craves to push the boundaries and explore uncharted territories. With her exceptional writing skills and in-depth knowledge of business-to-business dynamics, she creates compelling narratives that help businesses achieve tangible ROI. When not hunched over the keyboard, you can find her sweating it out in the gym, or indulging in a marathon of adorable movies with her young son.

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Should founder-CEOs have an expiration date? Research suggests yes

Delve deeper

The HBR research

When is a founder-CEO a good idea?

Authors

Kanika Sinha

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