S&P 500 companies led by founders outperform their peers

08 August 2016 Consultancy.uk

Building a large successful company, which has long term sustainable growth, is correlated to companies that have a strong internal ‘founder’s mentality’, according to new research. These companies have, among others, a clear higher purpose, direct and interested engagement with staff and customers, and a sense of responsibility and ownership of the company and its actions.

For the most part, businesses and startups are founded by the strange and enigmatic creature – the entrepreneur. The entrepreneur often has some insight or vision for improving some aspect of peoples’ lives or businesses’ performance, through a product or services, for which – for the most part – they ask some form of compensation. Founders, however, also come with a particularly set of attitudes and behaviours, a ‘founder’s mentality’, many of which come to determine the long term success of the company they foster and grow.

According to new research from Bain & Company, one interpretation of a successful ‘founder’s mentality’ is expressed through three key attitudes and behaviours. These three key features, according to recent research, are indicative not merely of success for businesses as such, but also allow businesses to significantly outperform peers – in terms of sustainable long-term growth – that have lost their founder(s) or whose founder(s) has been internally silenced.

The study, titled ‘Harnessing the power of the Founder’s Mentality’, expresses the three key features of the ‘founder’s mentality’ as:

  1. "The first is a sense of insurgent mission, characterised by a sense of higher purpose, a long-term horizon, and a few spikes in capabilities and assets that make a company special and are the centrepiece of its business model.
  2. The second is an obsession with the front line, characterised by an intellectual curiosity about every detail of the customer experience and of how everything in the business works. Executives use instincts formed at the ground level to make every decision; frontline employees are empowered and are the heroes of the business; and the customer voice is central to all decisions.
  3. The third is an owner’s mindset, characterised by a powerful sense of responsibility for employees, customers, products and decisions; an antipathy to bureaucracy; and a bias toward speed in decisions and actions".

Executives believe founders mentality is secret to sustainable growth

Sustainable growth
According to the respondents of a recent survey run by the consultancy firm, a founder’s mentality provides a clear advantage to the company that is commanded by it. Of respondents, around 75% of respondents say that they strongly agree that it gives a clear advantage, while 93% at least agree that it gives a clear advantage.

According to the research, the three key features of founder’s mentality provides a range of advantages to the company. Insurgency – seen as the most important advantage – provides the company with a bold mission, and external orientation as well as a long-term view toward which a company can actively work. A frontline obsession provides companies with an obsession for acquiring the right talent, an empowered frontline, and customer advocacy – the founders tend to care about their staff and customers rather than treating them merely as resources to be harvested, leveraged and/or processed. The owner’s mindset, according to the analysis, keeps companies focused and agile.

Founder-led companies consistently outperform market

To explore the effect of the founder mentality on a key performance metric, shareholder return, the firm divided S&P 500 companies into founder led S&P 500 and other S&P 500, measuring the difference in their performance between 1990 and 2014. Throughout the period, founder-led companies consistently outperformed non-founder led companies. In 2014, total shareholder returns were 3.1 times greater than other companies.

The garage startup, with the genius founder, is particularly prevalent within the tech-startup scene; however, even if the tech companies are excluded, founder-led companies still strongly outperform other companies – by 1.8 times in terms of shareholder returns.

Importance of characteristics of founders mentality on success

In addition to the strong correlation between founder’s mentality and shareholder returns, the consultancy firm also considered the difference between the top and bottom performers of 200 global companies. The research again found that top performers have considerably stronger expressions of the three key characteristics of the founder’s mentality – 74% of top performers had an expressed insurgency, 50% an owner’s mentality and 57% a frontline obsession.

Decline of founders mentality with company size

The research also looked at the conditions in which founder’s mentality appears to thrive. One of the biggest correlations to a successful expression of the founder’s mentality is company size. The largest the company, the lower the founder’s mentality score on average. In a company with revenues higher than $5 billion, the founder’s mentality score stood at around 56.1, while companies with revenues of less than $500 million had an average founders mentality score of 72.3. This suggests that, besides tech disruption and new business models, old, large incumbents need to consider the strength of the founder’s mentality of their up and coming rivals or find ways to return to their roots.

“Companies have become very good at monitoring external results like market share, customer acquisition and loyalty, and revenue growth. Yet, we find that most breakdowns in the marketplace today trace to deeper inner root causes about how the company was built and led on the inside,” says Chris Zook, founder of Bain’s Strategy Practice. “Business leaders and investors should pay as much attention to these measures of inner vitality as they do to results in the marketplace. This is becoming increasingly true in a world with ever stronger and faster young insurgent companies attacking incumbents that have internal issues that can get in the way of adapting and being able to retain the best talent.”

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