Wall Street Axing Founders: Does It Matter?

golden parachuteNo one cares more about a business that the person who starts it. Proud founders watch their businesses beat new challenges, hit new revenue targets and, if they’re lucky, make many of the early believers incredibly wealthy.

But as great as having a founding member in a C-suite can be, some founders overstay their welcome.

This year certainly has not been the year of the lifetime businessman. Micheal Dell is fighting off a proxy fight for control of Dell (DELL). George Zimmer of Men’s Warehouse (MW) was recently thrown out of his Chairman (and spokesperson) position after feuding with other directors and executives on where to take the company.

Even Best Buy’s (BBY) Richard Schulze struggled for control of his electronic retailing giant, only to later claim the unimportant title of “Chairman Emeritus”.  Wall Street’s sending a big messsage to long-lasting executives: it’s time to clean house.

 

What Founders Have to Offer

Corporate executives are the target of plenty of concern about their salaries and whether or not they truly care about the companies they lead. After all, how much can you really care about your job if last year’s salary could pay for retirement ten times over?

Founders generally get a pass; their company was once 100% theirs, after all. It’s attached to their name and their image because it’s their living, breathing resume.

Some long-lasting entrepreneurs were incredibly good to their companies, even after going public. Steve Jobs will be remembered as an excellent business person and marketer, despite the fact he wasn’t ever the nicest guy in the room. Bill Gates was great, too. Both companies eventually excelled under their leadership, although both faced rough patches of their own.

But then there is another group – people who can launch a company, but can’t keep public shareholders happy. Jerry Yang comes to mind as a founder and CEO who couldn’t keep on Wall Street’s good side when he refused to sell his baby, Yahoo.com, to Microsoft for an incredible $31 per share. Groupon shareholders couldn’t have been happier sending Andrew Mason packing after lackluster post-IPO performance.

Does tossing a founder really make a difference? Apple didn’t really do much until Jobs came back, but Yahoo shareholders have sent shares flying after Yang left. And Groupon’s ex-CEO Andrew Mason saw the share price rise 10% the day his resignation letter went out.

 

A Mixed Bag of Performance

Not surprisingly, the results after kicking out a founding member of a company are mixed. By the time enough pressure builds to send someone out the door, the problems are usually pretty public, and pretty obvious.

Dell, for instance, wants to essentially steal his namesake computer company with a lowball bid. No wonder why Carl Icahn doesn’t mind to see him go.

Yang of Yahoo denied the acquisition deal of a lifetime when he turned down Microsoft’s bid to the chagrin of shareholders. Everyone remembers that fiasco.

Just from these anecdotes, it seems the best time to toss a founder is when they’re too greedy with the finances. Dell wants to go private using his company’s money. Yang wanted to hold onto his baby, even if it made shareholders poorer. Andrew Mason wanted to stay on as a drinker of a CEO, even though he dumped much of his stake in the company when Groupon went public.

Maybe it might be better to focus on agency costs rather than whether or not a manager is a founder. So long as the people at the top have a very large financial incentive to make good decisions (ideally because they own a huge part of the company) the risk of disaster is muted.

Looking back, Steve Jobs and Bill Gates are the two most successful founders discussed above, and they had the most significant stakes in their companies at the time they left. Andrew Mason was one of the worst performing, and he had very little financial interest in Groupon when his resignation letter hit the wires.

Food for thought: it seems the least vested founders are the first to flounder.

What are your thoughts on founder leadership, founder ownership, and the recent spate of founder departures?

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Comments

  1. says

    I would guess that starting a company and getting business off the ground requires a much different set of skill than running a major corporation. I think some people can handle it, others can’t. It took Steve Jobs many years before he regained his status as the respected leader of Apple.

  2. says

    It seems to me that all of these founders lasted much longer than on average. Most companies outgrow their founder’s vision and abilities to manage a huge operation. The founder is usually an entrepreneur, and when a company moves past that stage, those gut instincts that created the first several million in sales doesn’t grow the company anymore.

  3. says

    Large or public companies should not be dependent on a founder. When it appears that a large company is entwined with the founder, it is a problem. Great companies establish a succession and management to sustain the growth and longevity of the company.

  4. says

    As companies grow and time passes a lot of things change. Founders are not always able to make the changes to keep up. If a founder is detrimental to the performance of the company then the founder needs to go.

  5. says

    When founder leadership is done well, it can mean success for the company like no other (and, of course, the founder). On the other hand, sometimes the masterminds behind the companies aren’t the best people to lead it. I think recognizing that and acting on it is a good thing.

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