By Kenan Institute Grant Recipient and UNC Kenan-Flagler Ph.D. Candidate Travis Howell
Featuring research by Howell, UNC Kenan-Flagler Assistant Professor of Accounting Brad Hendricks and UNC Kenan-Flagler Professor of Strategy and Entrepreneurship Chris Bingham
In 2004, Mark Zuckerberg founded Facebook in his Harvard University dorm room. The company’s user base grew at an exponential rate over the next several years, and Facebook now boasts more members than any single nation, language or religion. Though Zuckerberg guided the company through product development early on, its rapid growth brought new challenges associated with making the firm profitable, expanding overseas and developing an advertising network. To accomplish these tasks, Zuckerberg hired Sheryl Sandberg and other key executives to assist him as CEO. Since then, many outsiders have cited Zuckerberg’s inexperience and lack of oversight as reasons he should relinquish the chief executive role to Sandberg or another more qualified individual, arguing that he is in over his head as CEO of a multibillion-dollar company. Zuckerberg, however, assures his critics that he has no intention of stepping down or relinquishing control of the company he created.
Like Zuckerberg, other company founders often face a fundamental tension. On one hand, founders usually desire to retain as much control over their firm as possible. For some individuals this is why they become entrepreneurs in the first place, as they crave the freedom of being their own boss and implementing their own ideas. In addition, founders often become personally and emotionally attached to their firms. In fact, many refer to their business as their “baby” and use other similar parenting language without even noticing. This attachment, which stems from the amount of time, energy and effort founders put into building their business from its inception, links their personal identity to that of their company and fuels their desire to retain control.
On the other hand, however, founders often lack the competencies required to lead their companies through later stages of growth. Although they possess the entrepreneurial skills required to start and lead a new venture, they often lack the managerial skills required to command a larger and more complex organization. Even more challenges arise as firms transition from private to public, including intensified regulation and scrutiny of the decisions made by top management. These challenges are often too much for founders to handle, pressuring them to recruit others for their top management team. In these situations, the team members surrounding them are crucial in compensating for founders’ managerial deficiencies.
But do founders actually listen to these team members? Or do they just continue to listen to their own intuition? Some evidence suggests it’s more the latter. For example, Steve Jobs was often described as a dictator who listened mainly to his own instinct. Similarly, Elon Musk has a reputation for being domineering and has described himself as a “nano-manager,” causing many of his top executives to leave as a result. Likewise, Jeff Bezos hired Larry Tesler, a famous and renowned user interface expert, but then allegedly ignored everything Tesler said for the three years he was at Amazon.
In our study, we examined whether this management style was true across the board. Specifically, we looked at whether founders were more or less likely than other individuals to rely on their own judgment when making important strategic decisions and less on their teams. To do so, we examined the performance of more than 2,000 IPO firms, roughly half of which were led by founders and half by hired (i.e., non-founder) CEOs. What we discovered was interesting. We found that, although team structure had a significant impact on the performance of non-founder-led firms, it had little to no effect on the operating performance of founder-led firms. In other words, it didn’t matter what type of team the founder had, as the evidence suggested that the founders were relying more on their own intuition and not as much on their team.
Overall, these results suggest that founders may end up preventing progress rather than propelling it if they insist on maintaining a tight grip on decision-making. Leadership of a complex organization generally requires a joint effort, in which management teams share collective responsibility for the success of the firm. If founders are unable or unwilling to do so, then it may be best for them to consider stepping down from the CEO position. This may be difficult for emotionally attached founders to do, but it may be necessary for the good of their business. Overall, it is often in the release of control, not the retention of it, that founders can foster the continued growth and success of their organizations.
Read the full paper, here.