The Founder Effect

Conventional wisdom holds that founders of companies make poor managers. Now a new study of 2,327 large US public corporations finds that retaining the founders may significantly benefit the company's bottom line. An imaginary stock portfolio of the 361 founder-led firms in the study - which included Boston Scientific, Incyte Genomics, and other life sciences companies - would have outperformed the remaining firms by nearly 11% in share price performance during 1993-2002, according to study author Rdiger Fahlenbrach of Ohio State University in Columbus. Even after other factors such as size, age, and industry sector were taken into account, founder firms on the whole beat nonfounder firms by more than four percent. Fahlenbrach says that founder-led firms spent nearly nine percent more on research and development during the study period, as well as taking part in fewer acquisitions unrelated to the core business.

Founders who have survived the IPO stage feel less vulnerable than outside leaders and are more willing to take risks with a longer time-horizon for payoff, says Fahlenbrach. Noam Wasserman, who studies founder succession at the Harvard Business School, points out that venture capitalists and other board members are often quick to pull the trigger on founders. "Thus, the founders who are still CEO at IPO might be the "best of the best" compared to the nonfounder-CEOs," says Wasserman.