Founder-led companies crushed the JSE Top 40
Daily Investor’s analysis revealed that companies with the founder as CEO and a strong board presence performed much better than the JSE Top 40.
Founder-led companies are those where the founder of the business is the CEO, board member, or has a position with significant influence.
Investors are attracted to founder-led companies because they believe the company will be more competitive and have better prospects.
There are many reasons these companies are attractive, including that founders retain a long-term strategy and are less focused on short-term gains.
It is beneficial as the company will then be managed sustainably, bringing value to its stakeholders and increasing its viability.
A short-term focus can cause companies to generate profit in an unsustainable way, damaging their long-term profitability and viability.
Founders regularly use phrases like “this is my life’s work”, which illustrates their commitment to the company and long-term dedication.
They also have most of their wealth invested into the companies they founded, limiting the chances of mismanagement.
It gives investors a sense of security that somebody with skin in the game manages the company.
A Purdue University study of companies in the S&P500 discovered that, on average, founder-led companies were more innovative than their competitors.
Founder-led companies generated 31% more patents, and these patents were more valuable than those from non-founder-led companies.
They were also more willing to adopt new business models and invest in new technology.
Investing in founder-led companies
Daily Investor did a comparative analysis to see whether South African founder-led companies produced better returns than their competitors.
We considered companies in the JSE Top 40 index that were founder-led from 2000 to 2010 and compared them to the performance of the JSE top 40 index over the same period.
The companies identified for this period, together with their founders, are:
- Discovery with Adrian Gore as CEO
- Richemont with Johann Rupert as Director and CEO
- Shoprite with Whitey Basson as CEO
- Aspen with Stephen Saad as CEO
We created an equal-weighted index with the four shares and compared it to the performance of the JSE Top 40. Dividends were not included in either index.
For R100 invested, the founder-led index returned R809 in the ten years, translating into an annual return of 23.25%.
The Top 40 index, in comparison, returned R365 with an annualised return of 13.81%.
It backs up the belief that founder-led companies perform better, on average, and should be a factor to consider when picking stocks.