The Steve Jobs Effect: Are Companies Doomed When the Founder Leaves?

Source: Apple.

In August of 2011, Steve Jobs shocked fans around the world with his announcement that he would be stepping down as CEO of Apple (AAPL 0.64%) for health reasons. Before the announcement, the departure of Jobs was seen by some as the single greatest threat to owning Apple stock.

While the jury is still out on whether Apple will ever be as great as it was under Jobs, two things are clear. First, no game-changing gadgets have been introduced since his untimely death. And second, the stock performed demonstrably better when Jobs was at the helm than it has since.

This has led many investors -- myself included -- to seriously consider selling a stock when its founder leaves the executive ranks. But if we were to go back and crunch the numbers, what would history tell us about making such a move?

The answers might surprise you.

When executives leave
In order to get a historical perspective on this investing strategy, I went back and looked at the composition of the Nasdaq 100 in April of 2008. The index is made up of 100 of the largest nonfinancial companies listed on the NASDAQ index.

On April 1, 2008, founders ran 28 of the 100 companies on the index. Between then and now, 10 of those founders have vacated their position as chief executive officer.

There are examples of stocks that slumped after founders left. Apple's stock saw annualized returns of 32% with Jobs on board, but that return has slipped to 19% since he departed. And Apple isn't alone: SanDisk (NASDAQ: SNDK) averaged annualized returns of 37% when founder Eli Harari was CEO but has managed to post just 12% annualized returns since his departure.

But besides those two examples, the rest of the companies in this cohort actually showed much better stock returns after the founder stepped down.

Sources: Company websites, Businessweek, Google Finance

Though 10 data points aren't enough to prove a trend with absolute certainty, it's fascinating how clear the numbers are: On average, companies whose founders left have seen their stocks post annualized gains 20 percentage points higher than when the founder was on board.

Of course, we could look at each individual company and explain these anomalies away. Blackberry founder and former CEO Mike Lazaridis found a great concept that caught on with consumers, but he failed to continue innovating, and his product was eventually usurped by Apple and Android phones.

The same could be said of Yahoo!'s Jerry Yang, who refused to sell his company to Microsoft at a considerable premium -- and then failed to keep the company's business growing. Yahoo! has since started to right its ship with Marissa Mayer calling the shots, but Blackberry's woes continue with the recent announcement that it will not be bought out by Fairfax Financial.

Meanwhile, Vertex and Celgene needed drugs to be approved. Whoever was at the helm when that happened was the beneficiary of a nice pop in the company's stock price. Others, like Costco, have simply benefited from better market conditions since the founder stepped down.

Does this mean you should avoid founder-led companies?
As with many things in life, the answer is: It all depends. This list excludes the 18 other companies where the founder stayed on as CEO, so there's definitely a bias in these results.

It's also important to look at why founders step down. A lot of times, it's because a founder is an "idea" guy, and a company needs an execution and logistics person running the show.

There are times, however, when the CEO is the difference maker. Usually, these folks only step down when it's an absolute necessity -- because of sickness, age, or death, as was the case with Jobs.

Knowing why you are investing in a company -- and its CEO -- before you buy it is crucial. Only then can you know what to do when that ominous day eventually comes when a founder steps down.

Source: Matt Yohe, via Wikimedia Commons.