Most entrepreneurs serve as the CEO of the company they founded. Sometimes, they are indeed the best person to scale operations. In other cases, this is a necessity which decreases growth rates in the long run if a professional CEO is not hired to meet the changing needs of the firm. There are, of course, notable exceptions here: Amazon, Netflix or Facebook were turned into business empires by founder CEOs who kept their executive positions for more than a decade. Which brings us to the question: are long serving founder CEOs assets or liabilities?
Lee et al. analyzed the performance of 1435 S&P 500 firms between 1993 to 2003 to better understand the impact of founder CEOs on innovation and financial performance. Their findings are overwhelmingly positive: the patent count of founder CEO-managed companies was 31 percent higher than the patent count of professional CEO-managed businesses. Furthermore, founder CEO-managed companies were more efficient in R&D spending and had higher quality innovations, which led to better financial performance. Lastly, the advantages of founder CEO-managed companies increased in competitive industries.
So why were founder CEOs more successful in both finances and innovation? The authors offer two explanations. First, entrepreneurs tend to be risk takers which makes them more likely to invest in high-risk innovative activities. Risk taking is also often reflected in hiring similarly minded employees and offering them financial incentives to be aggressive in innovation. Second, founder CEOs are more invested in the long-term success of their companies and are less likely to suffer from job insecurity, which motivates them to support long-term research projects, which, in turn, offer significant breakthroughs instead of focusing on short-term projects with minor impact.
With time, however, it is good to reevaluate if the same CEO is still the best fit for a company, as discussed in an earlier post this month. Long CEO-tenure might impair growth, especially at high-growth firms.
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Contributed by Bence Juhasz