Some investors believe that companies run by their founder may have an intrinsic competitive advantage stemming from their leader's entrepreneurial spirit. A corporate founder may have more experience in running the company, a greater desire for the company to succeed, and incentive to take a long view for the business that aligns their interests with those of shareholders.
What are founder-led companies?
Founder-led companies can be described as those with a founder that is president, CEO, on the board of directors, and/or holds some other position of significant influence. It’s not uncommon for an individual or individuals to occupy multiple leadership positions. This compares with non-founder-led companies whose executives may have risen up through the ranks of the company or they have come from prominent roles at other companies, among other routes to an executive role.
Some speculate that the entrepreneurial and innovative nature that many founders possess helps these companies adapt to an ever-changing business climate.
Many investors believe that founder-run companies tend to take a longer-term view, rather than focusing to a greater degree on near-term results—such as beating expectations with the next earnings report. A founder CEO or other decision-maker may have greater motivation to maximize the long-term sustainability of a firm.
One reason for this perception may be that many founders have a vested interest in the long-term success of their company. Indeed, many can have significant skin in the game—in some cases, much of their life savings or personal assets. Additionally, a founder may think of their company as their life’s work, and thus may have extra motivation to see it last through time. Consequently, founders may have a greater desire, compared with non-founders, to ensure the long-term sustainability of the company.
If you are investing for the long-term, these perceived characteristics of founder-run companies may be a factor to consider when building your portfolio. Obviously, there are non-founders who also consider the long-term implications of their decisions, as there are also founder-run companies that fail to plan sufficiently for changing market conditions over time. Each investment opportunity should be evaluated on its own merits in order to meet your individual objectives.
Founder-led companies skew younger
Intuitively, it is more likely for a founder to still be in a leadership role for a newer company compared with one that is much older. For instance, the oldest company in the S&P 500 is Bank of New York Mellon (BK)—founded by Alexander Hamilton in 1784. Conversely, some of the largest publicly traded companies in the world who still have their founders in positions of significant influence are just a few decades old or less. If you were to screen for founder-run companiesLog In Required (login required, click on Themes to access the Founder Run screen), you will produce a list that skews toward newer companies.
It is quite common for new companies with innovative products and services to displace older, legacy businesses. However, there remain numerous companies that have been able to adapt with the times. An important consideration when analyzing any investment opportunity, regardless of whether it is a newer company or has existed for a long time, is to evaluate how established the firm is in the marketplace, and what its growth prospects are within their industry.
Additionally, keep in mind that a founder-run filter—or any thematic filter—can create biases (e.g., sector or style) that can have portfolio risk implications. If you are thinking about adding new investment opportunities, it is always prudent to evaluate how it will impact your entire portfolio.
Of course, simply because a company is run by its founder does not necessarily mean its management is superior relative to other professional leaders, or that the company will outperform its non-founder-run peers. As always, it's prudent to consider seeking out strong companies with earnings growth potential that are trading at attractive prices.
However, if you think founder-led companies that meet your investment objectives may be aligned with your long-term investing goals, you can explore stocks with a founder still at the helm or professionally managed funds that select among such companies.
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