Aswath Damodaran 1

MANAGING ACROSS THE

CORPORATE LIFE CYCLE: CEOS
AND STOCK PRICES
The Myth of the Great CEO
 The Lead In
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¨ One of the big news stories of last week was Jack Dorsey stepping down
as CEO of Twitter, and the market's response to that news was to push up
Twitter's stock price by almost 10%. That reaction suggests, at least for
the moment, that investors believe that Twitter will be better off without
Dorsey running it, a surprise to those in the founder-worship camp.
¨ As the debate starts about whether Dorsey's hand-picked successor, Parag
Agrawal, is the right person to guide Twitter through its next few years, I
decided to revisit a broader question of what it is that makes for a "great
CEO" and how the answer to that question lies in what stage of the
corporate life cycle a company is in.
¨ In the process, I will also look at the thorny issue of what happens when
there is a mismatch between a company and its CEO, either because the
board picks the wrong candidate for the job or because the company has
changed over time, and the CEO has not.

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 The Myth of the Great CEO: HBR
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¨ The Harvard Business School, every student who enters

the MBA program seems to be viewed as CEO-in-waiting,
notwithstanding the reality that there are two few
openings to accommodate that ambition.
¨ The Harvard Business Review, over the years, has
published multiple articles about the characteristics of
the most successful CEOs, and this one for instance,
highlighted four characteristics that they share in
common:
(a) deciding with speed and conviction
(b) engaging for impact with employees and the outside world
(c) adapting proactively to changing circumstances and
(d) delivering reliably.
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 The Myth of the Great CEO: McKinsey
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 The Effect of Popular Culture
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¨ That perspective also gets fed by books and movies about

successful CEOs, real or imagined. Consider Warren Buffett,
Jack Welch and Steve Jobs, very different men who have been
mythologized in the literature.
¤ Many of the books about Buffett read more like hagiographies than
true biographies, given how star struck the writers of these books are
about the man, but by treating him as a deity, they do him a disservice.
¤ The fall of GE has taken some of the shine from Jack Welch's star, but
at his peak, just over a decade ago, he was viewed as someone that
CEOs should emulate.
¤ With Steve Jobs, the picture of an innovative, risk-taking disruptor
comes not just from books about the man, but from movies that gloss
over his first, and rockier, stint as founder-CEO of Apple in the 1980s.

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Why one-size-fits-all does not work…

¨ Even if all successful CEOs share the qualities listed in the HBR/McKinsey papers,
not all people or even most people with these qualities become Successful CEOs.
So, is there a missing ingredient that allowed them to succeed? If so, what is it?
¨ I find it odd that there are no questionable qualities listed on the successful CEO
list, especially given the evidence that over confidence seems to be a common
feature among CEOs, and that it is this over confidence that allows them to take
act decisively and adopt long term perspectives. When those bets, often made in
the face of long odds, pay off, the makers of those bets will be perceived as
successful, but when they do not, the decision makers are consigned to the ash
heap of failure. Put simply, it is possible that the quality that binds together
successful CEOs the most is luck, a quality that neither Harvard Business School
nor McKinsey can pass on.
¨ There are clearly some successful CEOs who not only do not possess many of the
listed qualities, but often have their inverse. If you believe that Elon Musk and
Marc Benioff, CEOs of Tesla and Salesforce, are great CEOs, how many of the
Harvard/McKinsey criteria would they possess?

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A Life Cycle View of CEOs

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 The “Right” CEO
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¨ The Visionary: Early in the life cycle, as a company struggles to find traction with a
business idea that meets an unmet demand, you need a visionary as a CEO,
capable of thinking outside the box and with the capacity to draw employees and
investors to that vision.
¨ The Pragmatist: In converting an idea to a product or service, history suggests
that pragmatism wins out over purity of vision, as compromises have to be made
on design, production and marketing to convert an idea company into a business.
¨ The Business Builder: As the products/services offered by the company scale up,
the capacity to build businesses becomes front and center, as production facilities
have to be built and supply chains put in place, critical for business success but
clearly not as exciting as selling visions.
¨ The Opportunist: Once the initial idea has become a business success, the needs
to keep scaling up may require coming up with extensions of existing product lines
or geographies to grow, where an opportunistic, quick-acting CEO can make a
difference.
¨ The Defender: As companies enter the late phases of middle age, the imperative
will shift from finding new markets to defending existing market share, in what I
think of the trench warfare phase of a company, where shoring up moats takes
priority over new product development.
¨ The Liquidator: The most difficult phase for a company is decline, as the company
is dismantled and its sells or shuts down its constituent parts, since any one who
is put in charge of this process has only pain to mete out, and bad press.

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 Why CEO/Company Mismatches happen…
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¨ A Mistake: The first is that the board of directors for a company seeking a new
CEO hires someone who is viewed by many as a successful CEO, but whose
success came at a company at a very different stage in its life cycle. (Jeff Immelt as
CEO of Uber in 2017? Really?)
¨ A Gamble on Reincarnation: There are times when a board of director picks a
mismatched CEO intentionally, with the hope that the CEO characteristics rub off
on the company. This is often the case when you have a mature or declining
company that thinks hiring a visionary as a CEO will lead to reincarnation as a
growth company. While the impulse to become young again is understandable,
the odds are against this gamble working, leaving the CEO tarnished and company
worse off, in the aftermath. (Marissa Mayer at Yahoo! In 2012)
¨ Companies change: The third is a more subtle problem, where a company is well
matched to its CEO at a point in time, but then evolves across the life cycle, but
the CEO does not. Using the Uber example again, Travis Kalanick, a visionary and
rule breaker, might have been the best match for Uber as a company, disrupting a
highly regulated business (taxi cabs), but even without his personal missteps, he
was ill-suited to a company that faced a monumental task of converting a model
built on acquiring new riders into one that generated profits in 2017.

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 The Consequences…
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 Back to the Life Cycle
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 The Compressed Tech Life Cycle
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 Founder CEOs – Evidence on Turnover
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¨ Founder Displacement: Using data on top management turnover at young firms,

many of them non-public, he concludes that almost 30% of CEOs at these firms
are replaced within a few years of inception, usually at the time of new product
development or fresh financing. Much of this phenomenon can be explained by
venture capitalists, with large stakes, pushing for change in these companies, but
a portion of it is voluntary, and to explain why a founder CEO might willingly step
down, Wasserman uses the concept of the founder's dilemma, where founders
trade off full control of a much less valuable firm (with themselves in control) for
lesser control of a much more valuable firm (with someone else at the helm).
¨ Founder Worship: The founders who do manage to stay at the helm of companies
that make it through to early growth status are put on a pedestal, relative to CEOs
of established companies. While that may be understandable, in some cases, it
takes the form of founder worship, where founders are viewed as untouchable,
and any challenge to their authority is viewed as bad, leading to efforts to change
the rules of the game to prevent these challenges.

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 Entrenching Founder CEOs: The Peril of a
Compressed Life Cycle
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¨ In the United States, where prior to 2004, it was unusual to

see shares with different voting rights in the same firm, it is
now more the rule than the exception in many tech
companies.
¨ Endowing CEOs with increased powers to fend off challenges
seems like a particularly bad idea at tech companies, since
their compressed life cycles are likely to create more, rather
than less, mismatches between companies and their
founder/CEOs, and sooner, rather than later.
¨ If I am an investor, I would worry more than ever before
about giving up voting power to founder/CEOs, even if they
are well regarded, because today's star CEO can become
tomorrow's problem.

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 Implications for Investors
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¨ I have long argued that when investing in young tech

companies, you are investing in a story about the
company, not an extrapolation of numbers.
¨ The compressed corporate life cycle and the potential for
CEO/company mismatches that it creates adds a layer of
additional uncertainty to valuation. In short, when
assessing the value of a young company's story, you are
also assessing the capacity of the management of the
company to deliver on that story.
¨ To the extent that the founder is the lead manager, and
the narrative-setter, any concerns you have about the
founder's capacity to convert that story into business
success will translate into lower value.
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 1. Amazon
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¨ Many younger investors are surprised when I tell them that Bezos was not
a household name for much of Amazon's early rise, and that it was The
Washington Post acquisition in 2013 that brought him into public view.
¨ One reason that I attached lofty values to Amazon as a company, even
when it was a tiny, money-losing company was that Bezos not only
told the same story, one that I described as Field of Dreams story, where if
you build it (revenues), they (profits) will come. but acted consistently
with that story.
¨ He built a management team that believed that story and trusted them to
make big decisions for the company, thus easing the transition from small,
online book retailer to one of the largest companies in the world. It is a
testimonial to Bezos' success that Amazon's value as a company today
would be close to the same, with or without him at the helm, explaining
why the announcement that he was stepping down as CEO on July 5
created almost no impact on the stock price.

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 2. Twitter
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¨ I valued Twitter for the first time, just ahead of its IPO in 2013, and built a model
premised on the assumption that the company would find a way to monetize its
larger user base and build a consistently money-making enterprise.
¨ In the years since, I have been frustrated by its inability to make that transition,
and in this post in 2015, I laid the blame at least partially at the feet of Twitter's
management, contrasting its failure to Facebook's success.
¨ I don't know Jack Dorsey, and I wish him the best, but in my view, his skill set
seemed ill suited to what Twitter needed to succeed as a business, especially as
he was splitting his time as Square's CEO, and talking about taking a six-month
break in Africa. In fact, eight years after going public, Twitter's strongest suit
remains that it has lots of users, but its capacity to make money of these users is
still ill-formed.
¨ One reason why the market responded so positively, jumping 10% on the
news that Dorsey was leaving, is indicative of the relief that change was coming,
and the reason that it has fallen back is that it is not clear that Parag Agrawal has
what the company needs now. He has time to prove investors wrong, but he is on
probation, as investors look to him to reframe Twitter's narrative and start
delivering results.

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 3. Paytm
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¨ A few weeks ago, I valued one of India's new unicorns, Paytm, an online payment processing
company built on the promise of a huge and growing online payment market in India. In my
valuation, I told an uplifting story of a company that would not only continue to grow its user
base and services, but also increase its take rate (converting users to revenues) and benefit
from economies of scale to become profitable over the course of the next decade.
¨ I valued Paytm at about ₹2,200, but in telling that story, I noted one big area of concern with
existing management, that seemed to be more intent on adding users and services than on
converting them into revenues, and pre-disposed to grandiosity in its statement of purpose
and forecasts.
¨ In the months since, the company has gone public, and while the offering price, at ₹2150,
was close to my value, the stock price collapsed in the days after to less than ₹1400 and has
languished at about ₹1600-₹1700 since.
¨ If you were concerned about Vijay Sharma's capacity to convert the promise of Paytm into
eventual profits, before the IPO, you would have been even more concerned after listening
to him in the days leading into the IPO. It is still too early to conclude that there is a
company/CEO mismatch, but if I were the top management of the firm, I would talk less
about users and gross merchandise value, and talk and do more about picking up the
abysmally low take rate at the firm.

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 Family Group Companies
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¨ Much of Asian and Latin American business is built around family groups, many of
which have roots that go back decades. Using a combination of connections and
connections, these family groups have lived through economic and political
changes, and as many of the companies that they own have entered public
markets, they have stayed in control.
¨ To see how the corporate life cycle structure story plays out in family
group companies, it is worth remembering that family groups often control
companies that spread across many business, effectively resembling
conglomerates in their reach, but structured as individual companies.
¨ Consequently, it is not only possible but likely that a family group will control
companies at different stages in the corporate life cycle, ranging from young,
growth companies at one end of the spectrum to declining companies at the
other end of the spectrum. This intra-group capital market becomes trickier to
balance, as family group companies go public, since you need shareholder
assent for these capital transfers. With weak corporate governance, more the rule
than the exception at family group companies, it is entirely possible that
shareholders in the more mature and cash-generating companies in a family
group are being forced to invest in younger, growth companies in that same
group.

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 Implications for CEO Turnover: A Life Cycle
View
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¨ Studies consistently show lower forced turnover, when a company is led by a family member
CEO, which can open up mismatches between companies and CEOs at family groups. Here
are some things that family groups can do to reduce this mismatch problem.
¤ First, power has to become more diffuse even within the family, away from a powerful family leader
and towards a family committee, to allow for the different perspectives needed to become successful
in businesses at other stages in the life cycle.
¤ Second, there has to be a serious reassessment of where different businesses, within the family
group, are in the life cycle, with special attention to those that are transitioning from one phase to
another.
¤ Third, if top management positions are restricted to family members, the challenge for the family will
be finding people with the characteristics needed to run businesses across the life cycle spectrum.
¤ As many family group companies enter the technology space, drawn by its potential growth, the
limiting constraint might be finding a visionary, story teller from within the family, and if one does not
exist, whether the family will be willing to bring someone from outside, and give that person enough
freedom to run the young, growth business.
¤ Finally, if a mismatch arises between a family member CEO and the business he or she is responsible
for running, there has to be a willingness to remove or move that family member from power.

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 Implications for Investors
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¨ Are family group companies, in general, better or worse investments than

investments in other publicly traded companies? The evidence, not
surprisingly, is mixed, with some finding a positive payoff, which they attribute
to a better alignment of long-term investor and management interests at
these companies, and others finding negative returns, largely as a result of
management succession problems.
¨ To address why family control can help in some cases, and hurt in others, it
again helps to bring in the corporate life cycle.
¤ In the portions of the corporate life cycle, where patience and a steady hand are required, the
presence of a family CEO may increase value, since he or she will be more inclined to think
about long term consequences for value, rather than short term profit or pricing effects.
¤ On the other hand, if a family CEO is entrenched in a company that is transitioning from
growth to mature or from mature to declining, and is not adaptable enough to modify the way
he or she manages the company, it is a negative for value.
¤ Family group companies composed primarily of companies in the former grouping will
therefore trade at premiums, whereas family group companies that include a
disproportionately large number of disrupted or new businesses will be handicapped.

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