From vision to transition: Founder influence on CEO turnover
Founders are often perceived as the driving force behind family-owned companies, fuelled by a passion that frequently propels them to the Chief Executive Officer role. Notable CEO founders like Henry Ford at Ford, Elon Musk at Tesla and Bernard Arnault at LVMH exemplify this trend. However, the impact of founder-CEOs on long-term operational performance and market valuation is complex, as history shows. Addressing this, our research team at IESEG School of Management conducted a study to examine the dynamics of CEO turnover in listed companies, with a focus on founder involvement and its implications for company performance.
Our research reveals that most listed companies maintain good corporate governance. This is evident in the tendency to dismiss CEOs during periods of underperformance, gauged by both accounting profit and market returns. Essentially, CEOs are likely to face removal when economic profits dip or stock prices drop, the latter being a more indicator of the company's economic health and future prospects.
Interestingly, founder-CEOs appear particularly vulnerable to dismissal when market valuation decreases. This suggests that shareholders exert significant pressure on founders, especially amid plummeting stock prices, pushing for their resignation in tough times. However, this trend is less pronounced with accounting profits alone. It hints that investors in founder-led companies might have greater faith in the long-term vision of founders, prioritising it over short-term economic gains. Thus, our findings indicate that as long as the market believes in a founder-CEO’s vision and strategy, their position remains secure.
Dismissing a founder CEO can be a complex affair, as illustrated by Sam Altman’s journey with OpenAI. His initial dismissal, subsequent hiring by Microsoft, one of OpenAI's shareholders, and eventual reinstatement at OpenAI underline the intricacies involved. Media narratives often emphasised Altman’s charismatic leadership and the substantial support he garnered from employees, factors contributing to his return.
The complexity of dismissing founder-CEOs is further illustrated by contrasting cases. Steve Jobs’ initial ousting from Apple in 1985, despite being its founder, underscores the potential for conflict even with the board he helped assemble. On the other hand, the situation of Evan Spiegel at Snap Inc., the parent company of Snapchat, presents a stark contrast. Despite the company’s market value declining by almost 90% from its 2021 peak, Spiegel, its co-founder, has continued in his role as CEO. This scenario demonstrates how company ownership can act as a buffer for CEOs against dismissal, regardless of a decline of market value.
Furthering this notion, our study reveals a nuanced perspective on CEO ownership. We find that CEO ownership often protects outsider CEOs from dismissal after economic and market underperformance. In contrast, a founder CEO with significant ownership is more likely to step down following stock market decline. This dichotomy emerges from the different motivations driving outsider CEOs and founder-CEOs. While the former may prioritise personal wealth and status, possibly using ownership as a shield, founders typically have a deeper investment in their company’s success, sometimes at the expense of personal wealth. However, the Snap case exemplifies that this isn’t a universal rule.
Therefore, our findings underscore the importance of company boards exercising caution in their approach to motivating CEOs, particularly when it involves granting company shares.
In the lifecycle of family firms, it’s common for founders to transition from active management roles to positions more focused on oversight and monitoring. examples of this shift can be seen in Amancio Ortega Gaona of Inditex, renowned for its flagship retailer Zara, and Reed Hastings, co-founder of Netflix. Yet, our study shows that founder-CEOs don’t always excel as monitors. The presence of a founder on the board, especially as a non-executive member, can sometimes hinder the dismissal of an underperforming CEO, likely due to personal biases and relationships. This raises governance concerns in founder-led family firms. The recent appointment of Frédéric Arnault as CEO of LVMH Watches serves as a pertinent example in this context. Demonstrating early success in his role, Frédéric’s situation nevertheless brings to the forefront several questions regarding the dynamics of family business governance, particularly in the scenario of underperformance. Given that his father, Bernard Arnault, is the founder and CEO of LVMH.
In conclusion, while founders’ interests often align with those of shareholders, their effectiveness in active management or as monitors, particularly in family firms with the next generation involved, remains debatable. Our study highlights the ongoing challenges faced by first-generation family firms, both for the families involved and their investors.
Oskar Kowalewski is Professor of Finance at the Department of Finance at the IÉSEG School of Management (Campus Paris), Associate Professor at the Polish Academy of Science, and Fellow of the Wharton Financial Institutions Center at the University of Pennsylvania. He was previously Warsaw School of Economics (SGH) and the Kozminski University in Warsaw.
