The maxim in Silicon Valley is that founders make the most effective CEOs. Assuming that's true, can we understand a deeper reason for it? I think we can. To do so, let's talk about how groups make decisions.

- Famously, Arrow's impossibility theorem shows that no voting system will be rational in the human sense.
- A rational voting system means that:
- If every individual prefers option A over option B, then A should win over B. (Pareto Condition)
- If A wins out of the choice of {A,B}, then B should
**not**win out of the choice of {A,B,C}. Either A wins or C wins. (Independence of Irrelevant Alternatives) - No single voter can choose the election outcome. (No Dictator)

- Arrow's theorem says that it is impossible to have a voting system that satisfies all three of these conditions.
- Note: The voting system is abstracted away. Arrow's theorem applies to
*any*voting system. The only assumption is that individuals vote based on their ordinal (and not cardinal) preference.

- Note: The voting system is abstracted away. Arrow's theorem applies to
- Another way of describing Arrow’s theorem is: Groups of people cannot rationally make decisions.
- Or:
**Groups of rational agents are irrational.**

- Or:
- An important consequence of Arrow's theorem is that, for a group to behave rationally, its voters must be irrational or it must be run by a dictator.
- That is: Either the voters are irrational or the voting system is irrational.

- Why does this relate to firms? Because a firm is just a collection of individuals whose daily actions (i.e. votes) determine the direction of the firm.
- Thus, Arrow’s theorem also applies to firms:
**A firm will only behave rationally when it is run by a dictator.** - More loosely: Firms will behave more rationally when the power of the CEO is more concentrated.
- This is why large bureaucratic organizations, where power is dispersed throughout the organization, will often seemingly behave irrationally, lacking clear direction and regularly making illogical decisions.
- And hence the preference for founder CEOs who have the moral authority to wield concentrated power within the organization.

So, yes, there is a theoretical case to be made for founder CEOs.