Society tends to lionize individuals who guide their companies from the idea stage to multibillion valuations. But the likes of Jeff Bezos, Bill Gates, Richard Branson, and other famous founder-CEOs is rare, and not only because of the scale of success their companies achieved.
New research from a team of professors at the business schools of Duke, Vanderbilt, and Harvard universities finds that founder-run companies to be less productive and more poorly managed than those whose chief executives didn’t start the firm.
The researchers looked through data collected by the World Management Survey, a detailed review of more than 13,000 mid-to large-sized companies in 32 countries. Firms led by the people who founded them were 9.4% less productive, on average, and on average had consistently lower management scores-which typically rose once the founder-CEO was replaced.
“Founder CEOs were by far the worst type of CEO”, said Victor Bennett, an assistant professor of strategy at Duke’s Fuqua School of Business and a co-author of the paper.
Few founder-CEOs even get to see their companies grow as large as the businesses Bennett’s team studied. When Noam Wasserman, a professor at the USC Marshall School of Business, looked at 212 US startups (paywall) launched in the late 1990s and early 2000s, he found that only 50% of founders still controlled their companies three years after founding. Four years later that number was down to 40%, and only 25% of founders were in charge at the time of the company’s IPO.
Part of that has to do with funding. Investors typically don’t want to invest in companies too heavily dependent on a single individual, and will often insist on an external CEO as a condition of funding. It’s also an issue of skills: the traits and talents necessary to conceive and launch a product are often very different than those that help a business expand.
But founders’ poor success rate as CEOs also has to do with the kind of personality that’s compelled to start a company in the first place. People often start companies precisely because they want the freedom to run things as they wish-which sometimes includes poor managerial decisions.
“We found that some managers opt for less transparent management practices-nepotistic hiring, et cetera-partially because that’s the reason they got in the game”, Bennett said. “They might be fully aware that this is a less efficient style of management, but that’s the reason they got into being a CEO.”
Wasserman calls this the “rich versus king” test of a founder’s motivation, a term borrowed from Onset Ventures, the Silicon Valley VC firm that coined it. When a founder’s desire for control supersedes his or her motivation for profit, investors won’t sign on. And that desire for control can make the separation process an agonizing one. A full 80% of the founders Wasserman studied had to be forced out of their positions, often to the company’s detriment.
“Most are shocked when investors insist that they relinquish control, and they’re pushed out of office in ways they don’t like and well before they want to abdicate”, Wasserman wrote in the Harvard Business Review (paywall). “The change in leadership can be particularly damaging when employees loyal to the founder oppose it. In fact, the manner in which founders tackle their first leadership transition often makes or breaks young enterprises.”
Founders often refer to companies as their babies or children. If that’s the case, they should remember than knowing when to relinquish control and let a child grow on its own is one of the most important decisions a parent can make.
