Founders know best.
Like coddling parents guiding their kids as they grow, companies' founders have a gut instinct on how to best care for their babies.
Investors who've noticed the powerful link between founders and their companies have been rewarded. Shares of companies that retain their founders as CEOs, even after they become large corporations, have enjoyed gains that top the market by four times on average, according to a USA TODAY database study.
Apple aapl has become the most celebrated example. Its stock was $2.03 in 1985, adjusted for splits, when founder Steve Jobs left, according to market data provider CSI. When Jobs returned in 1997 after 12 years, shares traded for $3.95. Fast-forward 10 years, with Apple's shares at $127.57.
It's not just the Jobs effect. Think Larry Ellison at Oracle orcl and Fred Smith at FedEx fdx.
Academics, investors and founders themselves struggle to explain why having a creator at the helm is so helpful to a company. Possible reasons range from founders having deep industry knowledge to having a powerful presence in the company to having a huge financial stake in the success of the business.
Whatever it is, it works. USA TODAY used data supplied by Ohio State University finance professor Rudi Fahlenbrach identifying companies launched in the 1970s, '80s and '90s that still have the founder as CEO. Fahlenbrach's data study companies in the Standard & Poor's composite 1500 index, which includes companies of all sizes.
Going back 15 years, stocks in founder/CEO companies have surged an average 970%, vs. a 222% gain for the S&P 500, according to data from S&P's Capital IQ.
The club is small. Most founders of that era cashed out or aged into retirement, leaving 63 as of mid-July. While not all 63 of the stocks have soared, average performance has been huge. Big gains might be expected in the early years of hot upstarts, so USA TODAY examined stock performance only since 1993. That was after most of the 63 founders had vacated their garage laboratories for office suites.
The market's recent turmoil is a reminder that there's no guarantee past performance will be repeated. Yet, the enduring performance of so many founder-led firms is hard for professional investors to overlook. "I should've attached more attention to it over the years," says Rob Sellar, a money manager of Aberdeen Asset Management.
For founders, many eager to leave their creations in others' hands and do something else, the founder-knows-best phenomenon can be a burden.
Consider John Sperling. He was 83 in 2004 when he decided to give up the chairman role at the company he founded, Apollo Group apol, which operates University of Phoenix. Sperling, an academic by training, wanted to leave so he could write books.
Soon after he left, Apollo ran aground. He says squabbling raged inside the company, and accounting problems surfaced. In the time Sperling was gone between June 30, 2004, and Jan. 11, 2006, shares of Apollo fell nearly 30%.
He returned to a demoralized staff, a pending earnings restatement, an investigation into stock-option practices and a possible delisting from the Nasdaq. Apollo stock bottomed in the months after Sperling returned and has recovered 65% .
Apollo, up 6,340% in the past 15 years, led the 63, followed by Amazon amzn (4,381%) and Pre-Paid Legal Services ppd (4,302%). USA TODAY attempted to smooth out the impact of the highfliers, yet still found a median stock appreciation of 521%. Forty-seven of the 63 at least doubled the performance of the S&P 500.
Even when adjusting for industry trends, "The excess return is robust," Fahlenbrach says.
So robust that Charles Schwab schw, a member of Club 63 with a stock rise of 2,139%, sounded a little surprised. Schwab says he has met many members of the club, including those who join him on the Forbes 400 list of richest Americans: Jobs, Smith, Ellison, Warren Buffett, Michael Dell and Alfred West, founder/CEO of SEI Investments seic. "They have purpose," Schwab says.
"It's their baby," says Raymond Mason, CEO and founder of financial services firm Legg Mason lm, where the stock has risen 1,585% since 1993. "Founders feel like they raised the company from a pup. Their reputation is staked to it."
A personal stake
There are other reasons why founders have been better than CEOs who clawed their way to the top.
•Their personal fortunes are tied to the company stock. Ellison, for example, owns nearly 1.3 billion shares of Oracle, worth $25 billion. That focuses them more on share appreciation than paycheck appreciation, says Greenwich, Conn.-based Renaissance Capital Chairwoman Kathy Smith. Once rich, the founders' personal legacies become an overriding concern, and pride, a strong incentive.
•Because founders aren't looking for the next job, they don't risk long-term performance for the short. "We reinvent our company every 10 years. We've done this four times," says West, whose SEI Investments is up 1,808%. "It takes five years to reinvent and five years to collect the benefits. The quarterly stuff doesn't matter as much to the founder."
•They fight to survive in the early years, which leaves them positioned to deal with challenges down the road and gives them a glass-half-full optimism, says Fred Bauer, founder/CEO of auto supplier Gentex gntx, up 1,397% and a member of Club 63.
•No one knows an industry better, "the nuances, the tactile feel," says FedEx CEO Smith. Says Schwab: Founders make key adjustments, and his company was launched before the Internet age, as were Apple, Dell dell and FedEx. All are heavy users of the Internet today.
•The presence of a founder reduces the "tug of war between different people with different agendas," says Steve Wheeler, senior vice president at consultancy Booz Allen Hamilton. Fahlenbrach says that can cut both ways, as outside talent can be hard to recruit to founder-led companies because they see a ceiling to their future. Then again, FedEx's Smith says, CEOs who climb the ladder are not always comfortable hiring people who are smarter than they are.
"I'm not smarter, better or working harder," than CEOs who are not founders, says Pre-Paid Legal Services CEO Harland Stonecipher. The difference, he says, is that he started out with three employees and developed relationships as his stable grew to 800. Had he walked into a company with 800 employees, such relationships would have been impossible.
FedEx's Smith says there was a "self-selecting mechanism" at play with the study. "If you've been around a long time, you must be performing."
It's true that founders begin as entrepreneurs and often falter in the transition, Bauer says. "This takes a certain amount of sophistication. The personalities it takes to launch are not the same to keep a company growing and flourishing."
Of course, not all founder/CEOs beat the market. While department store company Dillard dds, down 52% under William Dillard, is the only company among the 63 to have a down stock since 1993, 18 have underperformed the S&P 500, and most have underperformed during one stretch or another.
Whole Foods Market wfmi is up more than 1,000% under John Mackey, but that includes a drop from its $77 peak in 2006 to $43.35 Tuesday, as the company says it is investigating blog entries allegedly posted by Mackey. In 2002, Pre-Paid Legal Services settled lawsuits accusing it of providing less service than promised; its stock stayed flat for more than two years.
But most periodic slumps are born of necessity because founder/CEOs are making adjustments for the long term, West says.
Stocks commonly flounder within a few years after the founder leaves. Wal-Mart is the textbook example, says Men's Wearhouse mw CEO George Zimmer, who in 1973 co-founded a retailer that has grown to 636 stores with annual revenue of $2 billion, and where the stock price has risen 1,396% since 1993.
Zimmer says Wal-Mart wmt retained the culture established by pickup-driving founder Sam Walton and could do no wrong for a time after he stepped down. It had an authenticity with consumers, employees and stockholders. Today, Wal-Mart is the corporate "whipping boy," blamed for the world's evils, Zimmer says.
Walton died in 1992, but other companies have brought back founders in an attempt to mimic what Jobs has done during his iPod/iPhone curtain call. Schwab came out of retirement three years ago when David Pottruck, a 20-year company veteran and Schwab's handpicked successor, led the company away from its roots of discounted commissions. The stock was $9.22 a share when Schwab stepped down. It was $8.30 when he returned and has recovered to $19.26. Michael Dell left his handpicked successor Kevin Rollins in charge in 2004 with the company stock at $35.22. It was $24.22 when Dell returned in January, and has recovered slightly to $26.17.
Jerry Yang, co-founder of Yahoo yhoo in 1994, had never been CEO until June, when he replaced Terry Semel, who had been wooed to Yahoo after 24 years at Warner Bros. Yahoo has yet to mount a recovery.
No founder lasts forever. While Dell is 42 and Jobs, 52, West is 60, Smith, 63, Stonecipher, 69, Schwab and Mason are both 70, and Sperling is 86.
"It would really bother me to think that in a few years, my successor could weaken something I've spent 35 years building, my entire adult life," says Zimmer, 58. "That would be disturbing."
When pressed, Mason says it's unlikely that his successor will be as successful. On the other hand, the company has become international, and it will take someone younger to visit Sydney or São Paulo.
Smith, who does not face mandatory retirement at FedEx until he's 72, says he has been making a study of companies as they face the transition. He's not worried. The key, he says, is home-grown talent.
Zimmer also plans to promote his successor from the inside. That will avoid, he says, the troubles of Home Depot hd, which landed the highly credentialed Bob Nardelli out of the General Electric farm system. Nardelli was ousted from Home Depot in January and hired as CEO of Chrysler this month.
"I like to fish," Stonecipher says. But he likes running his company more and predicts the next two or three years, as he moves into his 70s, will be his best.
Schwab has no immediate plans to step down. Sperling is eager to get back to his books. But not until he has faith that his legacy will survive.