Apple's CEO is unique, but one lesson we can take from his story is more universal. Corporate boards worship "superstar CEOs". But more often, the first executive makes for the best executive.
This year, dozens of startup company founders will be forced out and replaced by experienced outsider CEOs, often from public companies, brought in by venture capital investors to provide "adult supervision." You can bet that none of these companies will become the next Hewlett-Packard, the original Silicon Valley technology company -- or the next Intel, Microsoft, Oracle, or Apple.* These tech juggernauts span software, hardware, services, and media, but they all have something in common. Their founders served as transformative chief executives.
Still, the conventional wisdom among investors, if not the media, is that founders need to move out of the way for an experienced CEO to take a company "to the next level."** This piece of mythology plays into Steve Jobs' remarkable story. Apple would not be the world's most valuable and powerful technology and media company today without Jobs, its co-founder and its CEO from 1997 until last week, when he resigned because of health issues. But from 1983 to 1997, Apple was run by John Sculley (former president of Pepsi), Michael Spindler (a marketing and sales person from DEC and Intel), and Gilbert Amelio (former CEO of National Semiconductor), during which time it managed to go from inventing the modern personal computer to becoming an irrelevant, money-losing sideshow. Rival Michael Dell said that the company should be shut down. So much for that.
Outsider, non-founder CEOs are often overvalued because many corporate boards think the answer to their problems is a superstar CEO with an outsized reputation. This leads them to overpay for people who are good at creating outsized reputations through networking, interviewing, and taking credit for other peoples' achievements--all bad indicators of future success.
Rakesh Khurana has amply shown how this delusion of the charismatic
savior creates a dysfunctional market for CEOs, allowing the small
number of existing public-company CEOs to demand and receive extravagant
compensation. The myth of the generalist CEO is bolstered by the many fawning media portrayals where CEOs say that their key jobs are understanding, hiring, and motivating people--leading board members to believe that you can run a technology company without knowing anything about technology.
WHY FIRST EXECS MAKE BETTER CHIEF EXECS
The list of successful founders-turned-CEOs is daunting. You have Bill Hewlett and David Packard (HP), Robert Noyce and Gordon Moore (Intel), Bill Gates (Microsoft), Larry Ellison (Oracle), Steve Jobs (Apple). You could say I've hand-picked these names from among hundreds of founders who turned out to be lousy chief execs. You might be right. That's why we need data.
And the data shows that the first executives really do make better chief execs. That's because they have:
1) Better long-term focus: Rüdiger Fahlenbrach found that large U.S. firms run by founders had excess stock market annual returns of 8.3 percent (4.4 percent after controlling for a variety of factors). Founder-CEO firms invest more in research and development and have higher capital expenditures--things that you would expect to improve long-term performance rather than short-term earnings.