Online music service Pandora (P) is looking to tap the power of the founder CEO - for good reason.
Pandora , a company that allows consumers to stream music over the Internet, Monday named founder Tim Westergren as its CEO. The company seems to be looking to take advantage of a corporate trend: Companies managed by their founders have had the edge. The 19 companies in the Standard & Poor's 500 with current CEOs also reported as founders or co-founders, including social media giant Facebook (FB), online video service Netflix (NFLX) and sports apparel maker Under Armour (UA), on average have gained 97.5% over the past three years, according to a USA TODAY analysis of data from S&P Global Market Intelligence. That performance absolutely blows away the 31% gain by the S&P 500.
Pandora is the latest company turning to the leadership of a past founder to help it get its mojo back. Westergren, a composer and record producer, founded the company in 2000. Westergren takes the helm back from Brian McAndrews who was CEO starting in September 2013. Prior to joining Pandora, McAndrews was a top executive at a variety of companies such as Disney's (DIS) ABC, General Mills (GIS) and online advertising company aQuantive. But he wasn't a founder. Shares of Pandora have lost a third of their value over the past year. The company continues to lose money on an unadjusted basis and missed earnings estimates in the December quarter by a stunning 43%.
It's unclear if Westergren can get the company moving again, but founders do have a great track record. Facebook lately has been the best example. Facebook, which is still lead by its visionary CEO Mark Zuckerberg, has continually been at least one step ahead of its competition in one of the most hotly competitive areas of technology: social media. Zuckerberg first navigated the company from the shift from desktop computing to mobile. Also Monday, Facebook's Oculus kicked off the virtual reality trend by releasing its Oculus Rift headset to consumers. Facebook also had the foresight to buy online messaging service Instagram, which has proven a masterstroke as that service is catching on with the generation younger than Millennials.
The situation at Starbucks (SBUX) was also a strong one that shows the power of a founder. The coffee chain's growth and stock price were given a jolt when founder Howard Schultz returned as CEO in early 2008. Shares of the stock are up 223% over the past five years, trouncing the S&P 500.
Returning founder CEOs tend to reinvigorate companies, like Starbucks, but founder CEOs are also very effective at young companies. says Shaker Zahra, professor of entrepreneurship at the University of Minnesota. "There's a connection between a company (with a founder as CEO) and the motivation to build a name and a reputation, and also make money," he says. That's certainly been the case with the 19 S&P 500 companies with founders at the helm. Not only have these companies' shares outperformed as a group the past three years - but 14 of the 19 have individually beaten the market, too.
Longer term, the outperformance of companies with CEOs who are also founders is also strong. There are 16 current members of the S&P 500 where the CEO has also been the founder going back at least five years. Over the past five years, these stocks have gained an average of 170% - which crushes the 56% gain of the S&P 500 during that time. Even some of the stocks that have lagged in the past three and five years, such as Wynn Resorts (WYNN) have been solid performers even longer term. Wynn Resorts' shares are down 25% over the past three years on weakness in Asia. But investors that stuck with Stephen Wynn's company since its first day of trading in October 2002 are up 618% - topping the 127% gain by the S&P 500.
The positive influence of CEO founders holds even longer-term and by a solid margin. Between 1993 and 2002, the 11% of largest public U.S. firms headed by CEOs who founded the company rewarded with investors with excess annual returns of 8.3% compared with benchmarks, according to a study by Rudiger Fahlenbrach, while a professor at the University of Washington, Seattle. Fahlenbrach found companies with CEO founders made more investments aimed at the long-term sustainability of the business, including higher spending on research and development and higher capital expenditures. These companies were also more disciplined with mergers and acquisitions.
Time will tell if Westergren can help Pandora gets its groove back. But it's probably best to give the founder the benefit of the doubt.
S&P 500 COMPANIES CURRENT WITH FOUNDERS AS CEO
CEO/Founder, company, symbol, 3-year % ch.
Zuckerberg, Mark, Facebook, FB, 345.2%
Hastings, Reed, Netflix, NFLX, 274.3%
Plank, Kevin A., Under Armour, UA, 225.0%
Huang, Jen-Hsun, NVIDIA, NVDA, 172.3%
Bezos, Jeffrey P., Amazon.com, AMZN, 118.6%
Schultz, Howard D., Starbucks, SBUX, 108.6%
Schleifer, Leonard S., Regeneron Pharmaceuticals, REGN, 108.3%
Wexner, Leslie H., L Brands, LB, 94.6%
Bidzos, D. James, VeriSign, VRSN, 87.1%
Smith, Frederick W., FedEx, FDX, 64.3%
Benioff, Marc R., salesforce.com, CRM, 61.3%
Leighton, F. Thomson, Akamai Technologies, AKAM, 55.4%
Sprecher, Jeffrey C., Intercontinental Exchange, ICE, 44.9%
Mehrotra, Sanjay, SanDisk, SNDK, 37.9%
Fairbank, Richard D., Capital One Financial, COF, 26.2%
Kaufer, Stephen, TripAdvisor, TRIP, 18.9%
Patterson, Neal L., Cerner, CERN, 9.2%
Hayne, Richard A., Urban Outfitters, URBN, -16.2%
Wynn, Stephen A., Wynn Resorts, WYNN, -25.9%
Source: S&P Global Market Intelligence, USA TODAY
Follow Matt Krantz on Twitter @mattkrantz
