Firms, investors tend to prosper with founders at the helm

ByABC News
August 22, 2007, 8:30 AM

— -- 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.

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.