Tuesday, February 14, 2006

The strange politics of CEO succession

Should the founding entrepreneur stay or go?

I found an interesting article this week from Harvard’s Arthur Rock Center for Entrepreneurship. It’s about the strange politics of CEO succession that often results when a small business becomes so successful that the person who founded it can't run it properly any more.

There are always exceptions to this phenomenon – look at Bill Gates and Larry Ellison, or, closer to home, Frank Stronach or Jim Estill (click here for the blog of a CEO who loves to learn). Generally, however, most entrepreneurs aren't the right people to manage large, complex businesses. We all have our limits.

Professor Noam Wasserman of Harvard Business School’s Entrepreneurial Management Unit has studied what he calls founder frustrations. Here’s the paradox he sees:

“In large companies, when the CEO doesn't do well, the CEO gets replaced. When the CEO does do well, there is almost no chance that person will be replaced…

"My research shows that in small companies, it's still true that when founder-CEOs do badly, they are replaced. But the interesting paradox is that when founder-CEOs do really well, that also increases the chances that they're going to be replaced.

“The challenges within the company change so dramatically that the person who was best suited to lead the early stage of company development is no longer the best person to continue leading the company. Now, the product has to be sold: You have to create a sales organization, manage multiple functions, deal with customers, handle more complex financial issues, and deal with a very different set of challenges for which many founder-CEOs are not equipped.”

The trouble is, convincing the founder it’s time to go. “Objectively, many founders might agree that the CEO's job will require skills they don't have, but emotionally, they are very attached to the companies they started.”

Wasserman notes the pattern is even more pronounced when outside investors are involved. “VCs, in particular, often make the assumption that the person who started the company is going to have to be replaced along the way, and may therefore have a quicker ‘trigger finger’ than the founder-CEO wants.”

But all is not lost. While ex-CEOs in big business usually make a clean break, that’s not necessarily so in smaller businesses. “In entrepreneurial companies, the board often tries to find ways the founder can remain within the company in a different role, such as remaining on the board or taking a lower-ranking executive role. Because those founders are so central to their companies, losing them completely could be very disruptive for the company. The ideal situation is where the board and the founder can craft an appropriate non-CEO role, one that the founder willingly takes on.”

Of course, such changes do not come easy, Wasserman warns. “Given how hard it is to convince many founders that they should step down, there is also a big cost to keeping a disgruntled founder active in the company.” Stepping in to run a company is never easy, he notes, “but doing it in that kind of situation brings the challenge to a very different level.”

Read more here.

And Jim Estill, if you're reading this, why do you think you've been an exception?

4 pm UPDATE: Jim, the CEO of Synnex Canada, a $1-billion distributor of technology products that began out of the back of his car, has responded to the question! Check out his answer under "Comments," below.
And feel free to leave your own.

1 comment:

Jim Estill said...

I think you may have correctly identified - I like to learn and see a great need to do so. I have always had a vision of running a large company and worked hard to be prepared to run one.

I think the best CEOs are ones that know themselves well. This way they surround themselves with capable people to fill areas they need help in.

I think CEOs that do well long term put their company first - ahead of themselves if need be.

When a CEO stops learning or developing, it is time for them to move on.