Iconic founder-led companies such as Amazon and Facebook are heralded for preserving the soul of the original startup with their founding CEOs intact, and they have found successful formulas to scale. Yet this outcome is actually quite rare. A report from Harvard Business School revealed that less than half of founder CEOs continue to run the business after three years and fewer than 25 percent are in charge when a company goes public.
The odds are incredibly stacked against founders staying on as a business matures. Either they lack the capabilities or experience to scale their business, or it is too difficult to let go—or both. As Noam Wasserman wrote in Harvard Business Review, founders must decide whether “they want to be rich or be king” and how much they value scale vs. control. A critical test for an organization is whether it sustains its growth through this critical leadership transition.
As private equity firms continue to acquire or invest in private, founder-led companies, their boards are thinking about scale and how to double or triple their investment in a five-to-seven-year period. The board determines whether a company must bring in a professional CEO or COO who can help the company grow at an aggressive yet sustainable pace. And while there have been great transition success stories—think Microsoft’s Gates to Ballmer, Apple’s Jobs to Cook, and Walmart’s Walton to Glass—approximately half of leadership transitions fail, and the rate is even higher when a founder is involved.
A Proper Handoff
When considering the best way to make the transition from a company’s founder to its first external CEO, it is important to understand the psychology of most founders. These people may have become newly minted multimillionaires or billionaires, yet they have great pride in their legacy, having seen the business grow from the original entrepreneurial idea.
It is not surprising, then, that founders compare growing their business to raising a child. The founder likely has spent every waking hour for the past 10-20 years planning and protecting this business. The decision to choose scaling and growth over control is never an easy one, regardless of the financial rewards.
Transitioning away from founder leadership is a delicate matter, but it can be a successful and positive experience for the company and its founder, new CEO and board. Here are few areas that boards and investors should consider to ensure a proper handoff:
It is critical to hire an extremely competent and emotionally intelligent CEO.
Agree and align on how and when responsibilities will be transferred from founder to CEO. Outline key accountabilities and decision rights that will become the responsibility of the new CEO. Establish a timeline, check-in points and ensure the founder and new CEO are on board together with this. Develop and deploy a comprehensive communication plan that begins Day One. This will include one-on-one management meetings, skip-level sessions and all employee meetings. Host a few joint staff management meetings with the founder and CEO; eventually the founder’s participation can trail off, except in very specific areas where she is still contributing.
Ensure the founder has a role in the selection of her successor. While interviewing and assimilating the new CEO, make sure the founder is involved. While the founder may not have the knowledge to scale the company, she knows the organization and market probably better than anyone. It is important to have the founder’s support during the process. It is also critical for those who have high allegiance with the founder to see she has a role in succession planning. (Despite being involved, the founder should not necessarily make the final decision about the candidate.)
Continue to leverage the founder’s greatest strengths. The founder rarely disappears after a transition or when a new CEO is hired. It is important to assess and determine the best use of the founder during the transition period. Is she a master at product? Technology platforms? Holds key customer relationships? Be sure to engage the founder and keep her busy in meaningful work.
Integrate and win over those who joined the founder at the beginning. There are always those early-stage (and very important) employees who revere the founder. Recognize that any new CEO may be seen as foreign and signal an end of an era. In addition, the new CEO will naturally hire external talent. Unfortunately, two camps are often formed–those behind the founder and those aligned with the new CEO. The business needs both, therefore the new CEO most integrate (not cast aside) the tenured leaders and also show great respect to the founder.
Hire a CEO who has humility, emotional intelligence and proven capabilities to scale the business. Last and certainly not least, it is critical to hire an extremely competent and emotionally intelligent CEO. Having the full understanding of the context behind the founder’s transition will be a critical component of the new CEO’s onboarding. The new business leader must have the humility and authenticity to appreciate past company habits while driving the change and scale agenda. In addition, he should have the interpersonal gravitas to engage the founder for advice, direction and win over the organization. Regardless of competency, CEOs with big egos are abysmal leaders following a founder CEO. Boards and investors can assess this during the hiring process.
Playing the Long Game
Keep in mind that all of the above are rarely deployed perfectly. It is important to manage this transition as a process and not a one-time event or a series of employee meetings. There are always unpredictable business issues that arise–product or technology failures, lost key customers, employee resignations, etc. This is just business, so boards and investors should not rush to judgment. Most founder-to-new-CEO transition plans should last at least six months and ideally 12. A transition best practice is to collect 360-degree stakeholder feedback on the new CEO near the six-month mark to provide candid insight for him to learn and pivot. Boards typically stay close to the transition process in the first one to three months then back off while things naturally build. It is critical for the new CEO to have the support and freedom to do the job.
CEO transitions are high stakes initiatives and should not be initiated without proper planning and engagement with everyone involved. According to the Corporate Executive Board, if the leadership transition is successful, there’s a 90 percent likelihood that the business will go on to meet its three-year goals. When the founder of the company is involved, it only increases the complexity and potential challenges that lie ahead. Boards and investors should balance their respect for the past leadership and their desire to accelerate the agenda of the new leader. A successful transition will help set up the company for future success, to the benefit of the company, investors and the founder, whose entrepreneurial idea started it all.
After a successful corporate career, Dan Hawkins founded Summit Leadership Partners to help growth-oriented companies and business leaders improve organization performance. Since forming Summit, he has advised numerous boards, investors, CEOs and senior leaders in a myriad of industries across the globe.