CEO founders\’ value declines after IPO, study finds

When Jack Dorsey announced his resignation from Twitter in November, he wrote that there’s been “a lot of talk about the importance of a company being ‘founder-led\’” lately, but told employees he personally sees that mindset as “severely limiting and a point of failure.” In his goodbye letter, he went on to list why now was the time for Twitter to “break away from its founding and founders.”

Dorsey’s peaceful voluntary departure collides with other far messier recent breaks, like Adam Neumann’s from WeWork and Travis Kalanick’s from Uber, which has sparked discussion about if and when a founder-CEO can overstay his or her welcome at a company. A study out this month, called “The Founder Premium Revisited,” boldly attempts to stamp an actual “expiration date” onto that question, and the researchers’ answer is a little surprising.

The authors—Bradley Hendricks from the University of North Carolina’s Kenan-Flagler Business School, and Travis Howell from U.C. Irvine’s Paul Merage School of Business—took data on the performance of more than 2,000 publicly traded companies to see how those firms did once they went public. With Christopher Bingham, a UNC business strategy professor, the duo writes in Harvard Business Review that, on average, companies with founder-CEOs do outperform companies without founder-CEOs, but that this difference shrivels up to zero just three years after the IPO, after which point in time founder-CEOs “actually start detracting from firm value.”

To arrive at this time length, they analyzed the companies’ stock performance and various financial-accounting metrics (returns on assets and the like) to see what kind of relationship existed between a founder-CEO and their company’s performance. It was an almost 50-50 split between firms led by founder-CEOs when the data was collected, and firms under newer leadership. The researchers add that while they think there’s more to be gleaned from their data set, especially given 2021’s torrent of IPOs, they write they “have already uncovered some surprising insights.”

One is that founder-CEOs are associated with almost a 10% higher company valuation at the time of their IPO, but their value “rapidly deteriorates after that.” In fact, it “essentially dwindles to zero” three years later, then from that point on, founders start “detracting from the value of the company.” The authors hedge that “these are only trends, and there will always be exceptions,” but the data suggests that the shelf life for founder-CEOs is “likely shorter than many might hope.”

They say that investors hoping to jump onboard after a company has already gone public would be wise to consider “proactively encouraging” founder-CEOs to think about plotting an exit strategy. They conclude by offering three pieces of advice for making this the smoothest-possible transition. The first is to funnel founders toward non-CEO positions, like a board seat or even something else in the C-suite, like CTO. The second is to politely encourage them to pivot toward their “personal passions” instead of, you know, running the company they founded. Third, they say founder-CEOs should remain integral to their own succession planning, which sounds a little bit like a popular dark comedy series right now.