A founder CEO is an individual who establishes a

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...

and holds its

chief executive officer A chief executive officer (CEO), also known as a central executive officer (CEO), chief administrator officer (CAO) or just chief executive (CE), is one of a number of corporate executives charged with the management of an organization especially ...

(CEO) position. If the firm's CEO is not a founder or the founder CEO is succeeded, the firm is said to be led by a non-founder CEO or successor CEO. Research has highlighted differences between the founder and non-founder CEOs that influence firm performance. These differences include:

stock In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

performance,

equity stake In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...

in the firm, managerial incentives,

research and development Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...

investment, and outlook towards

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

. According to scholars such as Rüdiger Fahlenbrach, founder CEOs outperform their non-founder CEO counterparts in both stock performance and

market valuation Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's shares outstanding, outstanding common shares owned by stockholders. Market capitalization is equal to the share price, market price p ...

. They tend to take a long-term view and consider their firm their lifetime achievement, resulting in them holding a larger equity stake in their firm than non-founder CEOs. Darius Palia, S. Abraham Ravid, and Chia-Jane Wang developed this idea further, concluding that founder CEOs become less influenced by managerial incentives as they continue to devote resources to their firm, whereas the opposite is true for non-founder CEOs. Non-founder CEOs are less invested in their company and are more likely to tailor their performance according to managerial incentives. Scholars such as Joon Mahn Lee, Jongsoo Jays Kim, and Joonhyung Bae, concluded that founder CEOs continually invest in new projects and explore new knowledge to benefit the firm in the long-term. This suggests that a link between founder CEOs and a greater innovation investment. In terms of mergers & acquisitions, Fahlenbrach, along with other scholars, concluded that founder CEOs partake in a greater number of acquisitions within their

core business The core business of an organization is an idealized construct intended to express that organization's "main" or "essential" activity. Core business process means that a business's success depends not only on how well each department performs its ...

line each year, as they have a greater

risk tolerance In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more ...

. it is suggested that this additional risk taken on by founder CEOs stems from overconfidence at the CEO level, which some scholars have measured through their tone in tweets, regarding both

earnings call An earnings call is a teleconference, or webcast, in which a public company discusses the financial results of a reporting period ("earnings guidance"). The name comes from earnings per share (EPS), the bottom line number in the income statement d ...

s and personal statements, and their option exercise behavior relative to non-founder CEOs. Founder CEO succession can occur through both voluntary and involuntary means. American academic Noam Wasserman found that in the majority of founder CEO successions, the founder is forced to step down by investors. Founder CEOs who successfully execute

new product development In business and engineering, new product development (NPD) covers the complete process of bringing a new product (business), product to market, renewing an existing product or introducing a product in a new market. A central aspect of NPD is prod ...

or enter into negotiations with potential outside investors for additional capital have a higher likelihood of being replaced than those who are not as successful with product development and/or do not to raise additional capital. Indicated by several scholars, like Wasserman, as the CEO becomes successful in product development, the needs of the firm expand and a mismatch between the current skills of the founder CEO and the new skills needed for the firm's success is likely to occur, thus increasing the probability of succession. Founder CEOs are generally succeeded by someone from outside of the firm. Founder CEO comebacks have occurred whereby the founder CEO was replaced and later returned to their role as CEO. Eleven percent of the large

capitalization Capitalization (American English) or capitalisation (British English) is writing a word with its first letter as a capital letter (uppercase letter) and the remaining letters in lower case, in writing systems with a case distinction. The term a ...

firms in the United States are led by founder CEOs, including well-known companies such as

Facebook Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin M ...

Netflix Netflix, Inc. is an American subscription video on-demand over-the-top streaming service and production company based in Los Gatos, California. Founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, California, it offers a fil ...

FedEx FedEx Corporation, formerly Federal Express Corporation and later FDX Corporation, is an American multinational conglomerate holding company focused on transportation, e-commerce and business services based in Memphis, Tennessee. The name "Fe ...

and

Amazon Amazon most often refers to: * Amazons, a tribe of female warriors in Greek mythology * Amazon rainforest, a rainforest covering most of the Amazon basin * Amazon River, in South America * Amazon (company), an American multinational technology c ...

. A person or several people can be founders of a firm. The founders earn the 'founder' title only once the firm becomes operational, at which point their founder role ends. Founders do not have a particular role once the business is established, but their influence inevitably continues as they designed the firm's blueprint affecting structures and decision-making.

Negative and positive contributions to firm performance

Within research, several differences have been identified between how firms are led by founder CEOs and non-founder CEOs. Differences identified include stock performance,

, managerial incentives, innovation investment and participation in

. In November 2009, Fortune Magazine named

Steve Jobs Steven Paul Jobs (February 24, 1955 – October 5, 2011) was an American entrepreneur, industrial designer, media proprietor, and investor. He was the co-founder, chairman, and CEO of Apple; the chairman and majority shareholder of Pixar; a ...

, founder of

Apple Inc. Apple Inc. is an American multinational technology company headquartered in Cupertino, California, United States. Apple is the largest technology company by revenue (totaling in 2021) and, as of June 2022, is the world's biggest company ...

, the CEO of the decade. The six runners-up, all founder CEOs, were:

Bill Gates William Henry Gates III (born October 28, 1955) is an American business magnate and philanthropist. He is a co-founder of Microsoft, along with his late childhood friend Paul Allen. During his career at Microsoft, Gates held the positions ...

Warren Buffett Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net w ...

Martha Stewart Martha Helen Stewart (, ; born August 3, 1941) is an American retail businesswoman, writer, and television personality. As founder of Martha Stewart Living Omnimedia, she gained success through a variety of business ventures, encompassing pub ...

Bernard Madoff Bernard Lawrence Madoff ( ; April 29, 1938April 14, 2021) was an American fraudster and financier who was the admitted mastermind of the largest Ponzi scheme in history, worth about $64.8 billion. He was at one time chairman of the NASDAQ ...

Sergey Brin Sergey Mikhailovich Brin (russian: link=no, Сергей Михайлович Брин; born August 21, 1973) is an American business magnate, computer scientist, and internet entrepreneur, who co-founded Google with Larry Page. Brin was th ...

and

Oprah Winfrey Oprah Gail Winfrey (; born Orpah Gail Winfrey; January 29, 1954), or simply Oprah, is an American talk show host, television producer, actress, author, and philanthropist. She is best known for her talk show, ''The Oprah Winfrey Show'', br ...

Stock performance

According to some scholars, such as Rudiger Fahlenbrach, firms led by founder CEOs outperform those led by non-founder CEOs, in both stock performance and

. Between 1993 and 2002, an equally weighted portfolio consisting of companies led by founder CEOs would have earned an annual benchmark-adjusted return of 8.3%. In other words, an excess abnormal return of 4.4% annually. As of March 2016, 16 companies in the

S&P 500 The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...

still have founder CEOs, who have been with the company for at least five years. In aggregate, these companies have generated a five-year average

return Return may refer to: In business, economics, and finance * Return on investment (ROI), the financial gain after an expense. * Rate of return, the financial term for the profit or loss derived from an investment * Tax return, a blank document or t ...

of 170%, significantly greater than the 56% five-year S&P 500 gain. Of these companies, 14 have outperformed the market over the past three years. These companies include:

Under Armour Under Armour, Inc. is an American sports equipment company that manufactures footwear, sports and casual apparel. Under Armour's global headquarters are located in Baltimore, Maryland, with additional offices located in Amsterdam (European hea ...

Nvidia Nvidia CorporationOfficially written as NVIDIA and stylized in its logo as VIDIA with the lowercase "n" the same height as the uppercase "VIDIA"; formerly stylized as VIDIA with a large italicized lowercase "n" on products from the mid 1990s to ...

Amazon.com Amazon.com, Inc. ( ) is an American multinational technology company focusing on e-commerce, cloud computing, online advertising, digital streaming, and artificial intelligence. It has been referred to as "one of the most influential economi ...

Starbucks Starbucks Corporation is an American multinational chain of coffeehouses and roastery reserves headquartered in Seattle, Washington. It is the world's largest coffeehouse chain. As of November 2021, the company had 33,833 stores in 80 c ...

Regeneron Pharmaceuticals Regeneron Pharmaceuticals, Inc. is an American biotechnology company headquartered in Westchester County, New York. The company was founded in 1988. Originally focused on neurotrophic factors and their regenerative capabilities, giving rise to ...

L Brands Bath & Body Works, Inc. (formerly known as L Brands, Inc., Limited Brands, Inc. and The Limited, Inc.) is an American specialty retail company based in Columbus, Ohio. It owns Bath & Body Works, posted $11.9 billion in revenue in 2021, and wa ...

VeriSign Verisign Inc. is an American company based in Reston, Virginia, United States that operates a diverse array of network infrastructure, including two of the Internet's thirteen root nameservers, the authoritative registry for the , , and gener ...

Salesforce.com Salesforce, Inc. is an American cloud-based software company headquartered in San Francisco, California. It provides customer relationship management (CRM) software and applications focused on sales, customer service, marketing automation, a ...

Akamai Technologies Akamai Technologies, Inc. is an American content delivery networkJ. Dilley, B. Maggs, J. Parikh, H. Prokop, R. Sitaraman, and B. Weihl. (CDN), cybersecurity, and cloud service company, providing web and Internet security services. Akamai's Inte ...

Intercontinental Exchange Intercontinental Exchange, Inc. (ICE) is an American company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russe ...

, and

SanDisk SanDisk is a brand for flash memory products, including memory cards and readers, USB flash drives, solid-state drives, and digital audio players, manufactured and marketed by Western Digital. The original company, SanDisk Corporation was acquir ...

Equity stake

Fahlenbrach, like other scholars, concluded that founder CEOs have a larger

in the firm, potentially reducing the principal agent problem. Founder CEOs consider their firm their lifetime achievement and therefore take a long-term view. This approach results in the optimal shareholder-value maximizing strategy.

Managerial incentives

Incentive structures do differ for firms led by founder CEOs and non-founder CEOs as a result of different pay-performance sensitivity, as concluded by several scholars including Palia, Ravid, and Wang. A statistically significant relationship is present between these two variables for firms led by non-founder CEOs. Non-founder CEOs tend to be less invested in their company and are more likely to tailor their performances according to their payment incentives. Meanwhile, this relationship is insignificant for founder CEOs, who become less influenced by pay incentives as they devote more time and energy to their firm. This founder CEO attachment to their firm results in lower salaries, which can be seen in a study completed by Noam Wasserman on 528 ventures between the years 1996 and 2002. The results of this study concluded that 51% of founder CEOs make either the same salary or one that is lower than someone who reports to them. Additionally, the results showed that founder CEOs receive 20% less in cash compensation than their non-founder CEO counterparts with similar experience.

Innovation investment

Scholars have indicated that founder CEOs experience greater

innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...

performance than non-founder CEOs, who tend to be

risk averse In economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more c ...

. Extant research attributes these differences in innovation investment to founder CEOs taking a long-term approach, continually investing in new projects, and exploring new knowledge. Thus suggesting that founder CEOs are not as concerned with

job security Job security is the probability that an individual will keep their job; a job with a high level of security is such that a person with the job would have a small chance of losing it. Many factors threaten job security: globalization, outsourcing, ...

or impacted by short term performance, as a result resources are dedicated to the long-term. Lee, Kim, and Bae found that the existence of a founder CEO is

correlated In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...

with a 31 percent increase in the citation-weighted

patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...

count before controlling for research and development spending and a 23 percent increase after controlling for research and development spending.

Mergers and acquisitions

Fahlenbrach, along with others concluded founder-CEOs have a greater

and partake in a greater number of

acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

per year than non-founder CEOs. The

that founder-CEOs make do not diversify their portfolio because their acquisitions tend to be within their

es. Joon Mahn Lee, Byoung-Hyoun Hwang, and Hailiang Chen suggested that the additional risks taken on by founder-led firms stem from overconfidence at the CEO level.

Founder CEO overconfidence

Founder-CEOs overconfidence may have negative or positive effect on their firms. In a study completed on the S&P 1500 firms by Lee, Hwang, and Chen, it was concluded that founder CEOs use fewer negative words in both personal tweets and statements regarding

earnings Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before intere ...

. This optimism was observed to exist at the executive level as well. Founder CEOs also provide more optimistic earnings estimates than their non-founder counterparts. Investors are unaware of this overconfidence bias among founder CEOs and take them at face value indicating no discount taken into consideration in the

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...

s. In a 1988 study completed by researchers at Purdue University, this overconfidence was seen when 3,000 entrepreneurs, founders, claimed there was an 81% chance of success for them and only a 59% chance for peers. One in three of these entrepreneurs believed they had a 100% success rate. Additionally, options, which are tied to firm performance, were taken into account in Lee, Hwang, and Chen's study to measure overconfidence as most CEOs, founders or non-founders, are compensated in options to an extent. When analyzing option-exercise behavior using the value of vested in-the-money options to the total compensation, they concluded that founder CEOs had a significantly greater ratio. By comparison, they concluded that non-founder CEOs generally exercise their options immediately when they become exercisable in-the-money to receive cash and remove their compensation linkage to future performance. Founder CEOs, however, hold off on exercising their in-the-money options as they are overly optimistic about the firm's future performance.

Founder CEO succession

Occurrence

Wasserman concluded within the first three years of business operation, 50% of founder CEOs step down. The following year, another 10% step down and, by the time the firm has an

initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...

, less than 25% of founders still hold the CEO position. This being said, the decision to step down is not always voluntary, four out of five founder CEOs are forced to relinquish their role as CEO by investors.

Events affecting replacement likelihood

As indicated in Wasserman's study and others, founder CEOs experience higher turnover when they: # Successfully execute

product development In business and engineering, new product development (NPD) covers the complete process of bringing a new product to market, renewing an existing product or introducing a product in a new market. A central aspect of NPD is product design, along wi ...

. Thus, the quicker the founder CEO leads the firm to success in product development, the quicker they will be replaced. As the needs of the firm expand with product development, a mismatch is likely to occur between the current skills of the founder CEO and the new skills needed for the firm's success. # Enter negotiations with potential investors for additional capital. As personal investors (family and friends),

angel investor An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business or businesses start-up, usually in exchange for convertible debt or owners ...

s, and

venture capitalists Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...

invest in the firm, founder CEOs must often give up some control. It is also possible that potential investors will make their investment in the firm contingent upon the appointment of a new CEO. This occurs when the investors do not trust the founder CEO's ability to lead the company longer term. The likelihood of this happening is higher when the amount of capital needed is higher and outsiders have a larger equity stake in the firm, giving them more control in these decisions.

Founder CEO successor origin

Wasserman concluded that founder CEOs are almost always replaced by someone outside the organization (outside successor) opposed to someone inside (inside successor). Smaller and younger firms turn to tend to turn to outsiders, whereas in larger firms the

board of directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...

is disinclined to appoint an outsider successor CEO unless the firm has experienced poor past performance. Relative to inside successors, outside successors are known to make more changes within the firm altering the firms overall business strategy, earn higher compensation and achieve higher inter-organizational status.

Founder CEO comeback

A founder CEO comeback can be defined as a founder CEO who relinquishes their role as CEO and later returns to the position. A study completed by Ryan Krause, Abhijith G. Acharya, and Jeffrey G. Covin, on fourteen high-profile

Fortune 1000 The Fortune 1000 are the 1,000 largest American companies ranked by revenues, as compiled by the American business magazine ''Fortune''. It only includes companies which are incorporated or authorized to do business in the United States, and for ...

comeback firms, including

Apple An apple is an edible fruit produced by an apple tree (''Malus domestica''). Apple fruit tree, trees are agriculture, cultivated worldwide and are the most widely grown species in the genus ''Malus''. The tree originated in Central Asia, wh ...

, Gateway,

Dell Dell is an American based technology company. It develops, sells, repairs, and supports computers and related products and services. Dell is owned by its parent company, Dell Technologies. Dell sells personal computers (PCs), servers, data ...

, Charles Schwab,

Peoplesoft PeopleSoft, Inc. is a company that provides human resource management systems (HRMS), Financial Management Solutions (FMS), supply chain management (SCM), customer relationship management (CRM), and enterprise performance management (EPM) softwar ...

and

Google Google LLC () is an American multinational technology company focusing on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. ...

, identified five key conditions attributable to a founder-CEO comeback. The conditions include: poor performance, unplanned succession, founder on board, founder ownership, and interdependent board.

References

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