We discussed at our 2nd Tasgall meeting two two articles, one from Fortune and another by Dr. Fahlenbrach, regarding whether Founder-CEOs could serve as a first-pass filter for determining whether a stock is a potential long-term buy. Based on Fahlenbrach’s research, it appears that Founder-CEOs make up approximately 10-15% of the overall market. Thus, using Founder-CEOs as a first-pass filter to limit the number of stocks up for long-term investment consideration is a potentially effective tool, although it’s clear that additional filters would also need to be employed before making an investment in a company.

Fortune’s article boasts that the 27 firms within the Fortune 500 that had founder CEOs all significantly out-performed the rest of the S&P 500. This assertion is definitely worth additional research, especially since it was not clear that the Fortune or Fahlenbrach articles had truly weighed all the factors that could make this indicator predictive and useful. Some questions that arose were:

1) Where can we get data that includes stock returns along with founder-ceo vs. non-founder-ceo information?

1a) Does this data show clearly when a founder-ceo is replaced?

1b) Does this data account for survivorship bias of the companies and show delisted stocks?

2) Regarding survivorship bias, does Fahlenbrach’s data account for both the survivorship bias of both stocks and their founder-ceos? We noted that of the companies listed on the market, only 1 from the 1940s was included in his data–this seems to suggest that his data was skewed by survivorship bias.

3) Is this indicator actionable? Can we use this as a predictive tool? This requires that we can obtain and use founder-ceo information as an indicator that a stock is a buy for the long-term, know when a reasonable entry point is. I believe that while it would be nice to know when to sell based on founder-ceo information, this indicator alone is probably not going to be as helpful. The key here is determining whether a stock is a buy based in-part on whether the ceo is a founder.

4) Was the root cause of the founder-ceo company’s outperformance of the S&P 500 simply that small-cap funds have been booming as of late

4a) Is it safe to assume that founder-ceo companies are mostly small-cap? Further analysis of how founder-ceo companies stack up based on market cap and total assets is needed.

5) Is using founder-ceo as an indicator more difficult than it’s worth? For instance, could there be another indicator similar to founder-ceos that’s just a given with founder-ceos and thus could turn out to be a more predictive and causal indicator of a company’s market success? For instance, I’m thinking that it may be more relevant that the ceo owns more than 10% of the company’s stock, or that the ceo has a tenure with the company of more than 5 years, that the ceo:lowest-paid-worker ratio is less tan 20:1, or some other managerial plus that any good ceo in a well-run company would likely have.

So, here are the tasks ahead that I will take point on as my assignment between now and our next Tasgall meeting: I will try to find a free data set that includes this information (or find out who has this information available for a fee), then I will bring various manipulations of this data and my conclusions to the group for comments and suggestions. My goal is to take this idea further, learn how to challenge these theories and see if we can take something truly useful away from this. All comments, especially additional questions that we should ask of the data, are most welcome.