On Tuesday, Facebook announced its third-quarter results, with slightly higher revenues than analysts had expected and indications that mobile ads were showing results. Facebook shares rallied in after-hours trading on the news, which should help to quiet calls from some corners that the social network’s young CEO needs to be replaced by a professional manager in the aftermath of its troubled IPO. Reuters columnist John C. Abell, for instance, wrote in July that “Facebook needs its spiritual leader and chief innovator in a hoodie. But it doesn’t need him as CEO, placating investors in a collared shirt.”
A forced ouster of Mark Zuckerberg is never likely to happen, of course. Though Zuckerberg only owns about 28 percent of the company’s shares, he has 57 percent of the voting power, making a boardroom coup to replace the famous founder a highly improbable scenario. In addition, he’s backed by investor(and board member) Marc Andreessen, whose firm has publicly shared its position that it likes to invest in founder-CEOs who retain control of their companies.
Still, it raises an interesting question: Is there a point when Zuckerberg should step aside?
Conventional wisdom has long been that young, inexperienced entrepreneurs should be replaced by professional (read: grown-up) managers shortly before or after a company’s initial public offering, or at least at the first smell of trouble.
Sometimes it doesn’t work—such as at Yahoo, where two CEOs were brought in after cofounder Jerry Yang, only to later have Yang reinstated and then again replaced by veteran managers who have struggled to lead the company. Yet there are plenty of instances when it’s worked fine. (Think of Eric Schmidt’s arrival at Google to help cofounders Larry Page and Sergey Brin.) And these days, especially among hot tech start-ups with twenty-something entrepreneurs at the helm, it’s become the standard practice.
Maybe, however, it shouldn’t be. Research has shown that companies run by founder-CEOs have outperformed the stock market. Swiss Finance Institute professor Rudiger Fahlenbrach looked at the performance of the 2,300 largest U.S. companies from 1993 to 2002 and found that those run by founder-CEOs bested the broader market by eight percentage points a year. His research showed that founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions, which may result in better performance.
Other researchers have found that companies led by founder-CEOs tend to have higher valuations than their peers, and that entrepreneurs are less influenced by traditional pay-for-performance incentives. Since they’re often in it for more than just a massive payday, the thinking goes, such founder-CEOs are more likely focus on long-term success.
Facebook backer Andreessen Horowitz appears to agree. In a much-read blog post from 2010, one of the venture-capital firm’s partners, Ben Horowitz, argued that “founding CEOs naturally take a long view of their companies. The company is their life’s work. Their emotional commitment exceeds their equity stake.” He also writes that because technology companies are essentially innovation companies, founders have advantages that professional CEOs do not. “Often, true innovation requires throwing out many of the foundational assumptions of the company. If the company is significant, doing so may be extremely difficult for the professional CEO. … Since the founding CEO made the assumptions in the first place, it is much easier for her.”
Still, the great irony inherent in this debate is that the success many founders have as CEOs is precisely what can lead them to be replaced down the road. In his research, Harvard Business School professor Noam Wasserman has found that certain “paradoxes of success”—namely, securing new rounds of financing or reaching certain operational milestones such as completing product development—can cause a founder’s chances of being replaced to rise dramatically.
The more venture capitalists who get involved, and the more complex the company becomes, the more likely it is that other people begin to pull the company’s strings and, potentially, to question the CEO’s ability to manage the new operational complexities. When that happens, Wasserman told me in an interview, “the chances that the founder is going to be replaced go through the roof.”
As for Zuckerberg, Wasserman said that while it’s possible he could be replaced at some point, the voting power the Facebook founder has accumulated makes it appear he is “stacking the deck” in favor of a making any stay-or-go calls himself. He could choose to move on for philanthropic endeavors, as Bill Gates did, or simply decide “that there’s enough in the public company CEO role that he would prefer to offload to someone else.”
Jena McGregor is a columnist for the Washington Post’s On Leadership section.
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