Founder-led firms triumph over CEO-led ones in COVID-19 recovery: Reuters analysis

By Rahul Vaimal, Associate Editor
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Jeff Bezos Amazon CEO
Amazon CEO, Jeff Bezos speaking at a public event.

According to an analysis by Reuters, an international news organization, technology businesses headed by their founders have been the outstanding winners in share price performance and profit growth this year, beating companies headed by other managers.

So far this year, big founder-led tech companies have seen their share prices double, beating a 7.8 percent gain for the S&P 500 index comfortably.

They have also outperformed other tech companies led by hired managers, enriching investors and contributing billions of dollars to the fortunes of the founders themselves, including Jeff Bezos of Amazon, Reed Hastings of Netflix and Elon Musk of Tesla.

Earnings growth

Earning Growth Image
The graph shows the increasing difference in earnings growth between them

Profit growth has also outperformed, with founder-led tech firms witnessing growth of about 30 percent over the past five years, compared to 6.7 percent for businesses headed by other executives.

In the wake of a financial crisis, founder-led tech companies have a history of greater returns and quicker recovery. For instance, Amazon’s shares soared fifty-fold in the last bull cycle, while those of Netflix rose 100 times.

“Great entrepreneurs thrive in down periods when tectonic shifts are occurring in how business is done. Resetting periods allow visionaries to do more with less,” said David Brown, co-founder of US-based venture capital firm Impellent Ventures.

“We believe the next few years will create some absolutely amazing businesses. I would posit that investors will be well rewarded by backing a portfolio of entrepreneurial leaders in the coming years.”

Price performance

Price Performance Image
The difference is extremely evident in the sectors of consumer cyclical and technology

This year, the top 400 founder-led stocks from all sectors have registered an average share price gain of 58.4% versus a 10% return for the top 400 stocks led by others.

With the COVID-19 pandemic affecting many companies’ activities, investors are searching for companies expected to recover the fastest. Review of capital expenditure ( capex) plans shows why investors believe there could be an advantage for founder-led businesses.

Estimated earnings

Estimated Earnings Image
Graph depicts the estimated earnings for the businesses with different leadership in 2020

Founder-led businesses saw a 20 percent rise in capex in the first half of this year, while investment on future growth of companies led by others dropped 2 percent.

Founder-led companies are projected to report average net income growth of 22.8 percent in the next three years, compared to 7.1 percent growth for non-founder-led businesses, according to data.

Earnings growth and performance

Earnings Growth Image
The analysis compared the earnings growth and performance of founder-led tech companies and non-tech ones.

Ric Marshall, MSCI ESG Research’s executive director, said most founder-led firms will outperform non-founder-led firms this year in both price performance and profit growth.

But while they offer greater benefits for investors, higher risks are often associated with founder-led businesses, he said.

“In my experience the widely held CEO-led companies were the safer bet as they are less likely to outperform, but also much less likely to result in dramatic losses,” he said.