[The following "ETF Industry Perspective" is sponsored by Global X.]
On February 15, we launched the Global X Founder-Run Companies ETF (BOSS). The fund targets U.S. mid- and large-cap companies led by CEOs who are the original founders of their firms. BOSS is a part of our Alpha suite of ETFs, which are designed to outperform the broad market and are based on academically backed methodologies.
What differentiates founder-run companies from the rest of the market? We believe it boils down to three components: ownership, innovation and culture.
Ownership: Aligning compensation and incentives for the long-term
Founder/CEOs tend to have large equity stakes in their business, which can represent a substantial portion of their personal wealth. In fact, we found that founder/CEOs had 10 times higher ownership in their companies than the average S&P 500 CEO.i 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 with “professional CEOs” who join companies at a later stage of a company’s life. In research on founder-led companies, venture capital firm Andreessen Horowitz writes:
“Founding CEOs naturally take a long view of their companies. The company is their life’s work. Their emotional commitment exceeds their equity stake. Their goal from the start is to build something significant… Professional CEOs, on the other hand, tend to be driven by relatively shorter-term goals. They are paid in terms of stock options that vest over 4 years and cash bonuses for quarterly and yearly performance.”ii
When Founder/CEOs take a “long view” of their companies, it tends to align their incentives more closely with other shareholders. For example, the average annual compensation for founder/CEOs is 32% less than that of the average S&P 500 CEO, 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.iii In addition, these CEOs are careful to not take on excessive debt, as bankruptcy would wipe out the value of their equity stake. As a result, founder-run companies exhibit 52% lower debt-to-equity ratios than the S&P 500 as a whole.iv Overall, we believe this is a positive for long-term investors, as their aspirations for sustainable growth closely align with the founder’s goals and incentives.