Software engineers make the best CEOs, at least when measured by market cap

So, why are software engineers better CEOs?

From the onset, we have chosen to use one of Wall Street's measures of a better CEO – namely, market cap. In other words, by this measure, CEOs that create the most value are the best CEOs. Sure, there are other measures perhaps more virtuous; but market capital is well-known, generally reliable, and historically trended. So, let’s just roll with it as our measure of “better CEOs” as we have lots to discuss.

    An objective review of the data leads to the conclusion: top companies are increasingly founded and managed by software engineers.

Using our objective measure, we begin our analysis by applying the “smell test” to our underlying premise: “software engineers are better CEOs.” A cursory glance of the data by googling “wikipedia companies by market cap,” results in a historical list of public companies by market cap, and with a little more research regarding “Is Founder a Software Engineer” yields the following:

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Top 10 public companies by market cap, 2020 Q2
Company     Market Cap            Is Founding CEO SE?
Apple Inc.     $1,576B            Mix*, Jobs & Wozniak
Microsoft     $1,551B            Yes, Gates & Allen
Amazon.com     $1,432B            Yes, Bezos
Alphabet Inc.     $979B            Yes, Larry & Sergey**
Facebook, Inc.     $675B            Yes, Zuckerberg
Tencent     $620B            Yes, Ma Huateng
Alibaba Group     $579B            No, Jack Ma
Berkshire Hathaway     $432B            No
Visa     $412B            No
Johnson & Johnson     $370B            No

 

*Wozniak obtained a master’s in computer science in 1987 and does code. Though Jobs was brilliant and technically savvy, Jobs clearly didn’t professionally code; he did contribute to creative and technical designs

 

** Some might argue that Eric Schmidt was the first CEO of Google; but Mr. Schmidt was also arguably a professional software engineer, and Larry and Sergey were also arguably in control. Thus, Google yes

 

[editorial note: neither iiSM.ORG nor the author own stock or interests in any of the companies mentioned herein]

 

Reviewing the list of top companies, it is clearly populated predominately by software engineer-led entities, and these companies factually have higher market capitalizations. The list does vary from quarter to quarter, but deeper analysis reveals that the prevailing trend towards software engineer founded and managed companies is increasing, and that these companies are increasingly displacing traditional MBA-managed companies. As of the time of writing this article, Elon Musk and Tesla were moving rapidly up the list, crushing the market cap (10X greater) of traditionally managed car companies in so doing. An objective review of the data leads to the conclusion: top companies are increasingly founded and managed by software engineers. And exceptions, such as Steve Jobs, are interesting edge cases that seem to share many of the underlying factors that might help to explain the outstanding performance of software engineers as CEOs. The data also indicates that there are market segments in which software engineers are not dominant, such as many of Warren Buffet’s Berkshire Hathaway holdings, and further study of these cases is also informative.

 

Given the above findings, the serious question is not “Are software engineers better CEOs?” But rather, “Why?" So, what are the underlying forces that account for software engineers-CEOs being disproportionally represented in top companies? Why is the trend towards software engineering CEOs increasing, and what are the ramifications to the economy, markets, governments, educational institutions, and corporations?

 
The Ascendancy of Software

On its face, it should be acknowledged that the ascendancy of software plays a major role in the trend toward software engineering CEOs as 7-out-of-the-top-10 companies would not exist without software. However, the underlying animating forces of software are abstract, complex, and fairly diverse. Thus, appreciating software’s contributing factors takes thoughtful consideration as evidenced by the fact that the leaders on the list are increasingly software experts, suggesting that it’s not good enough to just have dabbled in software to succeed, and conversely implying, that companies are profoundly benefited by having deep understanding of software at the very top.

 

When considering the qualities of software, it is clear that software is much more than a digital building material for making applications. Software is also a powerful means of solving problems, a flexible tool for accomplishing work, a solution for facilitating business automation, a communication platform for connecting people across the globe, a high-powered intelligence gathering capability, and a speedy vehicle for delivering life changing products, services, content, and entertainment. Together, all of this capability makes software an extremely versatile form of super infrastructure that simply wasn’t available to prior generations.

 

Economists have long understood that new infrastructure results in the ability to meet societal needs at scale via a series of newly manufactured goods and services built on top of that infrastructure. And the people and communities that best know how to efficiently produce these goods and services have what Adam Smith referred to as an “absolute advantage,” which simply means the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group. In terms of economics, it would appear that software engineer CEOs and software teams in general, have an increasingly clearer absolute advantage in growing swaths of the modern economy.

 

The curious question is, “Why are software leaders dominating in businesses outside of purely software companies?”

 

The most likely explanation for the success of software leaders in the list of top-ten companies is that they use and evolve software platforms to rapidly accelerate the value fulfillment cycle. In simplified economic terms, here’s how these cycles work: value is the result of monetizing a newly discovered or more efficient way of meeting needs at scale, where the need is physical, social, or psychological in nature. For example, Amazon fulfills physical needs on a massive scale via efficient, reliable online-ordering and delivery of goods, and Facebook fulfills social/psychological needs on a massive scale by connecting related and likeminded groups of individuals. Both companies, having successfully monetized the fulfillment of needs en masse, have invested the resulting cash into the subsequent value cycles, funding the discovery of additional products, features and services while improving platforms of meeting existing, known needs. Amazon and Facebook are aggressively powering their way through the four value stages of the value fulfillment cycle:

    Potential Value – discovery of need that requires investment to exploit
    Discovered Value – discovery of solution and repeatable business model
    Replicated Value – operating and scaling discovered business models
    Liquid Value – monetizing operations and generating free cash flow for next investments

Software platforms running on top of software super-infrastructure are now speeding the rate of each subsequent value fulfillment cycle. For example, discovery of potential value is being accelerated by software platforms that collect big data for software driven analytics and deep learning. Discovery of solutions and business models are being accelerated by software-powered cloud platforms that facilitate discovery of solutions via techniques like continuous A/B testing and discovery of customers and traction via promotion and virality over massive, software-enabled social networks. And, scaled operations are being automated and actively monitored by software platforms, massively increasing the efficiencies and effectiveness of ongoing services. All of these software powered value development activities result in faster, better, and more dominant value fulfillment cycles.

 

Our takeaways regarding the ascendancy of software are as follows:

    Software is an emerging global, super infrastructure for meeting needs
    Software platforms uniquely play a role in all four stages of value development
    Having expert knowledge of software is increasingly a critical success factor to those building companies that have a large market capital valuation

So, obviously, those that understand the super infrastructure that is software have a competitive advantage over those that don’t. But, as these leaders move up, they aren’t actually the ones writing the software. So, what differentiates their management practices such that those under them are better able to create and scale value? Other forces must be at play, it’s not as simple as the company’s products and services are software based. In the next sections, we will drill into the value stages for likely causes.
Force #1, Finding Potential Value (Potential Value)

Maslow was correct in his assertion that human behavior can be best understood as a progression of