A founder CEO, often written as founder / CEO and also as founder & CEO is an individual who establishes a

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

as a founding CEO and holds its

chief executive officer A chief executive officer (CEO), also known as a chief executive or managing director, is the top-ranking corporate officer charged with the management of an organization, usually a company or a nonprofit organization. CEOs find roles in variou ...

, Organizatinal Founder(CEO) position. If the firm's CEO is not a founder or the founder CEO has 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 Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

performance, equity stake in the firm, managerial incentives,

research and development Research and development (R&D or R+D), known in some countries as OKB, experiment and design, is the set of innovative activities undertaken by corporations or governments in developing new services or products. R&D constitutes the first stage ...

investment, and outlook towards

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...

. 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 outstanding common shares owned by stockholders. Market capitalization is equal to the market price per common share multiplied by ...

. 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 line each year, as they have a greater risk tolerance. 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 calls 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 New product development (NPD) or product development in business and engineering covers the complete process of launching a new product to the market. Product development also includes the renewal of an existing product and introducing a product ...

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 ( North American spelling; also British spelling in Oxford) or capitalisation (Commonwealth English; all other meanings) is writing a word with its first letter as a capital letter (uppercase letter) and the remaining letters in ...

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

Facebook Facebook is a social media and social networking service owned by the American technology conglomerate Meta Platforms, Meta. Created in 2004 by Mark Zuckerberg with four other Harvard College students and roommates, Eduardo Saverin, Andre ...

Netflix Netflix is an American subscription video on-demand over-the-top streaming service. The service primarily distributes original and acquired films and television shows from various genres, and it is available internationally in multiple lang ...

Nvidia Nvidia Corporation ( ) is an American multinational corporation and technology company headquartered in Santa Clara, California, and incorporated in Delaware. Founded in 1993 by Jensen Huang (president and CEO), Chris Malachowsky, and Curti ...

FedEx FedEx Corporation, originally known as Federal Express Corporation, is an American Multinational corporation, multinational Conglomerate (company), conglomerate holding company specializing in Package delivery, transportation, e-commerce, and ...

and

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

. 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, equity stake, 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 businessman, inventor, and investor best known for co-founding the technology company Apple Inc. Jobs was also the founder of NeXT and chairman and majority shareholder o ...

, founder of

Apple Inc. Apple Inc. is an American multinational corporation and technology company headquartered in Cupertino, California, in Silicon Valley. It is best known for its consumer electronics, software, and services. Founded in 1976 as Apple Comput ...

, 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 businessman and philanthropist. A pioneer of the microcomputer revolution of the 1970s and 1980s, he co-founded the software company Microsoft in 1975 with his childhood friend ...

, Warren Buffett, Martha Stewart,

Bernard Madoff Bernard Lawrence Madoff ( ; April 29, 1938April 14, 2021) was an American financial criminal and financier who was the admitted mastermind of the largest known Ponzi scheme in history, worth an estimated $65 billion. He was at one time ...

, Sergey Brin and

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

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 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...

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,

, Amazon.com,

Starbucks Starbucks Corporation is an American multinational List of coffeehouse chains, chain of coffeehouses and Starbucks Reserve, roastery reserves headquartered in Seattle, Washington. It was founded in 1971 by Jerry Baldwin, Zev Siegl, and Gor ...

, Regeneron Pharmaceuticals,

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 $7.4 billion in revenue in 2023, and was ...

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

, Salesforce.com,

Akamai Technologies Akamai Technologies, Inc. is an American company specialized in content delivery networkJ. Dilley, B. Maggs, J. Parikh, H. Prokop, R. Sitaraman, and B. Weihl. (CDN), cybersecurity, DDoS mitigation, and cloud services. It is headquartered in ...

, Intercontinental Exchange, and SanDisk.

Equity stake

Fahlenbrach, like other scholars, concluded that founder CEOs have a larger equity stake 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 service (economics), services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a n ...

performance than non-founder CEOs, who tend to be risk averse. 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 statistic ...

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 sufficiency of disclosure, enabling discl ...

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 risk tolerance and partake in a greater number of acquisitions per year than non-founder CEOs. The acquisitions that founder-CEOs make do not diversify their portfolio because their acquisitions tend to be within their core businesses. 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 {{Short description, Financial term 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 u ...

. 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 marke ...

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 investm ...

, 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 New product development (NPD) or product development in business and engineering covers the complete process of launching a new product to the market. Product development also includes the renewal of an existing product and introducing a product ...

. 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 to a business or businesses, including startups, usually in exchange for convertible de ...

s, and venture capitalists 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 is a governing body that supervises the activities of a business, a nonprofit organization, or a government agency. The powers, duties, and responsibilities of a board of directors are determined by government regulatio ...

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 comeback firms, including

Apple An apple is a round, edible fruit produced by an apple tree (''Malus'' spp.). Fruit trees of the orchard or domestic apple (''Malus domestica''), the most widely grown in the genus, are agriculture, cultivated worldwide. The tree originated ...

, Gateway,

Dell Dell Inc. is an American technology company that develops, sells, repairs, and supports personal computers (PCs), Server (computing), servers, data storage devices, network switches, software, computer peripherals including printers and webcam ...

, Charles Schwab, Peoplesoft and

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

, 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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