Shares of companies that are run by CEOs who are the founders of the businesses, so called owner-entrepreneurs, outperform the average market significantly. It’s no mystery why entrepreneurs accomplish much more. It is all about incentivization.
Owner-entrepreneurs are heavily incentivized to drive the profitability of a business because they share in those profits. They also have their entire egos attached to their businesses. Employees with fixed salaries and small performance bonuses are much less incentivized to make a business succeed. Superior returns can be achieved by investing alongside owner-entrepreneurs.
One study compared the 25-year stock market performance of founder-led publicly traded companies with the performance of the rest of the S&P 500 from 1990 to 2014. The study found that S&P 500 companies in which the founders were deeply involved performed 3.1 times better than the rest. That is massive outperformance by the owner-entrepreneur-led companies.
Owner-entrepreneur CEOs are more successful for so many reasons:
– They take a long-term view of their companies, while professional CEOs are more focused on the short term, trying to maximize this year’s bonus.
– Owner-entrepreneurs avoid taking on excessive debt and risk because that would endanger their large ownership stakes.
– They keep costs low and focus on employee performance.
– Owner-entrepreneurs take less salary. They take 32% less compensation than the average for all S&P 500 CEOs.
All good reasons why you should invest in founder-led companies.
Sven Franssen