Hired CEO or founder: who do investors trust more

The departure of the CEO of the founder of one of the largest IT companies in the world, Amazon, has raised the age-old question: can hired managers be as effective as business founders?

Faith in the power of founder-led companies grows at critical moments, and investment funds and analysts pay more and more attention to this factor. Statistics confirm the advantage of such companies, which often outperform companies managed by hired managers in terms of business indicators and dynamics of quotations. But a lot depends on the stage of development at which the business is located.

Cox change

Founder Jeff Bezos stepped down as Amazon CEO in 2021. Starting as an online book retailer in 1994, over the course of 27 years, the entrepreneur has built a diversified e-commerce and IT platform with a strong brand, technology and a huge user community.

The companies that Amazon competes with for investor attention and position in many business areas are currently run by hired managers. For example, Apple and Microsoft were founded in 1976 and 1975, Google in 1998. Over time, founders move to strategic positions on the board of directors, pay more attention to mergers and acquisitions, charity and new projects, delegating the operational management of the business to hired managers. Many continue to actively influence the development of the business for a long time after leaving, such as Bill Gates at Microsoft, but are no longer involved in operational management.

A separate story is the long-term rule of investor Warren Buffett in another large public company from the top 10. Despite the fact that Buffett did not found Berkshire Hathaway, it was he who completely reformatted it, so that he can be called the founder of this brand in a new incarnation – as an investment company.

Who runs the top 10 public companies

Source: Yahoo Finance , as of 09/15/2021

Market reaction

One of the reasons why the market did not react sharply to Bezos’ decision is the company’s strong position at the moment when the founder decided to hand over the helm to a new leader from among pre-prepared candidates to succeed Andy Jesse. Bezos is making big plans for Amazon and is actively interested in a number of new projects. He recently announced an investment in anti-aging start-up Altos Labs, and is keenly interested in the space projects of his other company, Blue Origin, on which he may now be able to devote more time. As well as projects with a social vector  – The Washington Post and Day 1 Fund and Bezos Earth Fund.

The announcement of Bezos’ departure in early February coincided with the publication of the annual report: marked by massive lockdowns due to the pandemic, 2020 brought the leader of online commerce and cloud services a significant increase in revenue and profit. From the beginning of 2021 to September, Amazon quotes have grown by 7%.

The influence of the Bezos personality not only on the company, but on the entire industry is very great. But due to the correct implementation of the role reversal, investors’ fears were muted by the continued active position of the founder and continuity in the company’s strategy. This gives the market time to observe and adapt to the new state of affairs. Indeed, as history shows, the capitalization of a company can grow several times even in cases where the founder leaves it, as was the case, for example, with Steve Jobs. Expectations of the collapse of Apple after his departure and death gave way to a multi-year rally in stocks against the background of rising revenue and profits of the company under the management of Tim Cook.

By 7%

Amazon quotes have risen since the beginning of 2021, despite Bezos’ statement

Sometimes the “wrong” founder is at the helm, or after major mistakes, the company’s investors stop trusting him. So, Elon Musk, whose personality Tesla owes to the rapid growth of capitalization, was not the first among the founders of the company to take the post of CEO. Founder of Yahoo! Jerry Yang was fired by the board of directors after his refusal to merge with Microsoft and the collapse of the company’s quotes. Uber co-founder Travis Kalanick was also removed from direct leadership, retaining his seat on the board of directors, and Jack Dorsey fought for several years at the helm of Twitter with his co-founder Evan Williams.

Nevertheless, in the period of global technological shifts and the rapid transformation of most industries, it is the active role of the founder, who managed to succeed in the new conditions, that is of great importance as a factor in further development and, accordingly, investment attractiveness.

Focus for investors

Reuters analysts in the fall of the crisis year of 2020 decided to consider the speed with which large companies are recovering from the impact of the pandemic. According to the published reports and on the basis of analysts’ forecasts, both in terms of growth rates of quotations and in terms of revenue dynamics, companies managed by the founders won compared to issuers managed by hired managers. Amazon, Netflix and Tesla were especially distinguished. Earnings are also growing faster under founders, up 30% over 5 years compared to 6.7%.

30% vs 6.7%

growth rates of founder-led companies versus that of hired managers

Companies’ revenue dynamics (%)

Source: Reuters

“Great entrepreneurs thrive in times of recession when there are tectonic shifts in the way they do business. Zeroing allows visionaries to do more with less,” David Brown, co-founder of Impellent Ventures, told Reuters. At the same time, MSCI ESG Research CEO Rick Marshall drew attention to the higher risks for founder-led companies.

A few years earlier, Bain & Company partner Chris Zook wrote in an article in the Harvard Business Review about a study by Purdue’s Krannert School of Management that found that S&P 500 companies that still have the founder as CEO are more innovative, generate more 31% more patents and more likely to make bold investments to innovate and adapt their business model. They demonstrate a willingness to take risks in order to “invent the future.” Further, the author presented the results of an in-depth study by Bain experts of about 200 companies around the world, where the founder was either a CEO or a member of the board of directors and had a significant impact on the business.

By 31%

more patents are generated by founder-led companies

It turned out that the results of companies are directly influenced by the cultural code of the founders and precisely the preservation of this code, the basic entrepreneurial principles within the company, regardless of the formal position of the founder. The common feature of this code is to give the business a purpose, which affects employee engagement. The second feature is the obsession with the “advanced” business, that is, the focus on the client, the quality of the product and service, attention to detail, and so on – everything that prevents the company from becoming a bureaucratic machine that ignores the end consumer. The third element, according to Bain’s research, is the owner mindset that led to capital growth, which is about speeding up action and taking personal responsibility for risk.

Founder Investment Tools

The idea that founders of companies are better than managers in anticipating trends, willing to take risks and, importantly, motivated to increase capitalization, is reflected in new financial instruments. Large investment group Fidelity, in its mutual fund Fidelity Founders Fund, launched in 2019, includes companies where the founder does not necessarily continue to hold the position of CEO, but has a significant influence on its development. Her portfolio includes Google, Amazon, NVIDIA and other companies. Earlier, the company’s experts released a study , noting the lead in the dynamics of quotations of the founders-led companies.

In September 2021, a mutual exchange-traded fund (ETF), which collects shares of companies managed by their founders, slightly outperformed the major US indices in terms of growth since the beginning of the year (+21%). However, the dynamics of the technology sector expectedly slowed down after a powerful rally last year. Called Global X Founder-Run Companies and with the talking stock ticker BOSS, this ETF is pegged to the  founder-led Solactive US Founder-Run Companies Index.

Fund managers shape their strategy based on the belief that company founders tend to create significant personal wealth based on the value of those companies. And therefore, as leaders, they are additionally focused on creating the long-term value of companies. That is, they are most interested in their development and capitalization growth, and are also thoroughly familiar with the relevant industry, innovations and affairs in the company itself. The fund’s portfolio includes shares of Salesforce , NVIDIA, Affirm, DoorDash, Synopsys, Blackstone, Netflix and other companies, including many recently entered the market through IPOs. However, the dynamics of this ETF at different time intervals can be both better and worse than other indices, and unambiguous conclusions cannot be drawn in its favor. According to the fund, revenue for the past three years was 78%, which, given the explosive growth of the technology sector last year, is not surprising – the NASDAQ Composite index from the beginning of 2018 to the end of 2020 rose by almost 100%.

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