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Here’s Proof That Most Founders Make Bad CEOs

People who found companies may not be cut out to run them.

That's the finding of a comprehensive study of management practices in nearly 10,000 firms around the world, primarily in manufacturing, from the National Bureau of Economic Research. Firms that are both owned and run by their founders have, on average, worse management practices than any other management structure. That includes companies led by dispersed shareholders, private individuals, and even the government.

For the purposes of their study, the researchers defined "best" management practices as continuously analyzing performance, setting challenging short- and long-term goals, and rewarding high performers while retraining or firing low performers. Firms with these practices are generally more profitable, more productive, and more competitive.

" Firms that are owned and led by their CEOs typically tend to underperform in terms of the management practices," said Rafaella Sadun, an assistant professor of business administration at Harvard Business School and one of the authors on the study. "Our interpretation is that the genius that comes up with a new idea or new model might not be the right person to manage the organization."

NBER management study
NBER management study

NBER Working Paper Series

Sadun cautions that the numbers in the study are just averages, and notes that the bulk of their sample came from manufacturing companies. They've looked less at small businesses and startups, where it's common for the founder also to be the owner and CEO.

At small companies like those, Sadun says it might not be bad to have a founder-CEO: what they lack in management ability, they're likely to make up for in commitment. "They have more skin in the game," she said.

Although not directly related, the study suggests why Bill Gates may have been bumped from chairman of Microsoft 's board to a technology adviser role. In recent months, Gates, who co-founded the tech giant, has drawn criticism for not keeping pace with other major tech firms and missing major trends in mobile and cloud computing — areas where a corporate wizard like new CEO Satya Nadella may be stronger.

"The entrepreneurial skills required of a start-up (e.g., creativity and risk taking) are not the same skills required when a firm grows large enough to enter our sample (at least 100 employees)," write Sadun and her coauthors, Nicholas Bloom of Stanford University, Christos Genakos of the Athens University of Economics and Business, and John Van Reenen of the London School of Economics .

"A mature firm needs to move beyond informal rules, and these may be implemented more effectively by a professional manager," they add.

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