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 usual 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 over B, and B wins over C, then A should win over C. (Transitivity)
- 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) - All preferences are allowed. There are no restrictions on what any individual can prefer. (Unrestricted Domain)
- No single voter can choose the election outcome. (No Dictator)

- If
- Arrow’s theorem says that it is impossible to have a voting system that satisfies all of these conditions all the time.
- 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 reliably make rationally decisions.
- Or:
**Groups of rational agents tend to be irrational.** - Or: A single individual making decisions will always be more consistent than a group.

- Or:
- In other words, for a group to always behave rationally, its voters must be irrational or it must be run by a rational dictator.
- That is: Either the voters are irrational or the voting system is irrational.

- Why does this relate to firms? Think of a firm as a collection of individuals whose daily actions (i.e. votes) determine the direction of the firm.
- If this analogy holds, Arrow’s theorem applies:
**A firm will only reliably 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**.

- If this analogy holds, Arrow’s theorem applies:
- 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.