Does founder know best?
That’s the idea behind an exchange-traded fund that made its debut last week, and which only holds names where the chief executive officer is the same individual who created the company in the first place. The fund, the Global X Founder-Run Companies ETF
is a bet that founders will be better managers than subsequent generations of executives, resulting in outperformance.
There is some data to support this thesis. According to Bain & Company, an index of S&P 500 companies where the founder was “deeply involved” performed 3.1 times better than the overall index.
Bain credited this to three factors, including an “owner’s mindset,” or “taking personal responsibility for risk and for cost”; a “front line obsession,” which “shows up in a love of the details and a culture that makes heroes of those at the front line of the business and gives them power”; and business “insurgency,” which the report defines as a “sharp sense of purpose” that other companies lose as they mature.
The report was written by Chris Zook, a co-head of Bain & Company’s global strategy practice, and published in the Harvard Business Review.
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Those attributes can certainly apply to non-founder CEOs, while others founders may be better at developing products than managing a business. However, Global X noted that founder CEOs have greater financial incentives to develop their business for long-term growth. Chief executives who also started their company have an ownership stake that is 10 times greater than the average CEO, according to data provided by the ETF operator.
“This significant financial investment, combined with an intense emotional connection with the company that they founded and nourished, often results in different incentives for founder/CEOs when compared to ‘professional CEOs’ who join companies at a later stage of a company’s life,” wrote Jay Jacobs, the firm’s director of research. “When Founder/CEOs take a ‘long view’ of their companies, it tends to align their incentives more closely with other shareholders.”
Jacobs noted that the average annual compensation for founder CEOs was nearly a third less than the average chief executive of an S&P 500 company, “as founders understand that maximizing their salary could come at the expense of deploying cash to fund long-term growth opportunities, and thus hurt their equity value over the long term.”
Companies run by their founders also have debt-to-equity ratios that are 52% lower than the overall S&P, according to Global X’s data.
Since its debut, the Global X fund is down 0.6%, compared with a 0.1% rise in the S&P 500
Of course, the ETF has only traded for two sessions, making comparisons premature.
The fund doesn’t own small-cap stocks, which tend to be more volatile, but it does have a bias toward younger and more growth-orientated names, rather than mature companies with multidecade track records.
Top 10 holdings include Jen-Hsun Huang’s Nvidia Corp.
Reed Hastings’ Netflix Inc.
and Mark Millett’s Steel Dynamics Inc.
Among the more prominent founder-run companies, Jeff Bezos’ Amazon.com Inc.
is the ETF’s 44th largest holding, at 1.003% of the portfolio, while Mark Zuckerberg’s Facebook Inc. is 53rd, at 0.972%.
While few companies are as associated with their chief executive as Berkshire Hathaway Inc.
that is not a component of the ETF. While CEO Warren Buffett turned the company into the conglomerate that it is today, it was originally founded in the 1800s as a textile manufacturing company.