Leading After the Founder

As the individual who established the company takes a back seat, emotions become high and most organizations fail. The following is the way to handle the transition. One of the most emotional and strategy bearing moments in the life cycle of a company is the founder transitions. In their proper approach, they open the next stage of growth and maturity; in their improper approach, they may verge on instability in teams, compromise value, and defeat momentum. The stakes are high: Founder CEO transitions are associated with the risk of failure or the decline of performance two- to three-fold compared to those with nonfounder CEOs. PE-backed, publicly or privately-owned, founder-led companies face the same question as they grow: What happens when the same person who made the company is now the thing that prevents its further growth? Or would rather retire yet the company is not prepared to run without the founder?

Once a deal has been closed or a new growth stage is taking shape, certain founders are in a good position to continue to manage their businesses over the long term. Therefore, is the founder the right person to be the CEO before you think about transition. The best course of action that companies may discover is not to take action at all. Probably, in that case, all you can do best is to recruit new members to the team to help the founder and invest in succession options without compelling a decision.

An example in point

When one of the founders of the company sold the company to a private equity firm, she started planning the next stage of her business by recruiting a president and the COO who would become her successor in the company and switching into the role of a board chair. They were textbook moves though she got frustrated with them soon. "One morning I was lying on a Tuesday morning and I woke up and I found out that all my friends had gone to work," said to us. "I knew that I wanted to be back in the business." She was not 40 even then, and she was yet to make up her mind to retire because she was tired or uninspired, it was merely the thing that founders did when they sold their companies. Her executive team was happy when she reversed her decision and decided to continue as CEO and the business proceeded to succeed to raise another successful PE round.

What made it work?

The founder was self-conscious, flexible, and committed to developing a team that worked together. With time she transformed into being tactical into strategic with the aim of doing what only she was able to: defining culture and vision. Her revitalized management brought about transparency and unity in the corporation and her presence was at the core of its success. In a different scenario, a founder that had been working with his business over 20 years strategized a complete departure and started a search of an outside CEO. But with the changing economic environment and new business challenges, he began to believe that it will be irresponsible to quit. He did not hurry the process of transition, but rather, he prolonged his own term, creating time to nurture a successor in the company. The decision to remain on track has ensured that the organization has maintained stability in a turbulent period and it has allowed the organization time to get its next chapter correct.

When a founder transition is the appropriate decision, there are two typical ways that a founder raises the prospect proactively, or others raise the prospect. Neither path is simple. In other instances, the founder admits his personal burnout or constraints and indicates that he is willing to transfer the baton. With others, the founder might be the last to realize that her style or abilities are not what the business requires to grow or expand.

The first indicators of a transition being needed

• the apparent decrease in the founder's habitual innovative or disruptive ambition
• the tendency to revert to old answers to new problems
• growing irritability with his staff
• losing enthusiasm at his job or the company itself Psychologically, the ideal moment of a transition would be when a founder realizes that he/she needs a change but still has the energy to be actively involved in succession planning. Transitions involving founders are best when they are established on a strong point that is, when the founder can sell a successor in a convincing and clear manner. In comparison, the changes, which are caused by a crisis, can lead to a ripple effect: The identity of the founder is destabilized, and the successor will have to deal with both the dysfunction of the organization and the culture shock. We worked with one of the founders who had taken years to develop a healthcare company to start-up and emerge as an icon in the industry. However, as the company grew, her input into the daily running of the company turned out to be a bottleneck. The board and investors were respectful in their approach and presented a transition as a chance to promote her influence. "Perhaps, it is time you crossed to this side of this table and govern and protect your investment," they said to her. That framing was something that appealed to her values and legacy goals. In comparison, the other founder also had a sudden health crisis and got out of the business by a sudden sale without a succession plan. His cofounder took the initiative to act as an interim CEO, however, she did not have the competencies to assume a leadership position on a big scale. The company had fallen because it was unable to find a successor and it had a weak bench of leaders. The lead private equity investor reported that, "10 or 11 years back, they should have acted before everything got this bad that their founder felt he was forced to resign." "Although we were just a minority partner and could not go top down, there were steps we could have undertaken to stem the situation and become more demanding to sit down with him side-by-side and formulate a plan."

Founders have been their own business builders and they do not want to be pushed to the background. They desire that their legacies are respected, and in many cases, they desire to maintain some significant level of responsibility and control, even when they lose their daily duties. The high level of agency in founders during transitions may be in the form of control or volatility not because of distrust, but because release of the same will undermine their identity. The trick is to find a position that suits their interests and talents as well as meets the changing demands of the business. The founder in the health care case above became the board chair and advocated and researched. Still, she represented the firm in professional conferences and was still supporting the innovation in the clinical field, just leaving the operations to her successor. Over time, and with feedback and coaching she eventually found her footing in a role that was neither limiting the business nor diminishing the authority of her successor nor obstructing the legacy and strengths that she had.

The change may take the wrong direction when the new job is ambiguous or symbolic

One of them had its founder appointing the successor himself and shifting to a nonexecutive chair. The successor was a person who had the right credentials but the founder had difficulties in letting go. He sabotaged the new CEO and was not ready to give up his office and still was not emotionally disengaged. At some point, the successor threatened to take legal action to compel a contractual provision which ensured his promotion. The founder was relegated into a hollow chair position that was demeaning, and the firm has been at a disadvantage since then under the burden of a partial transition.

A successful transition is structured to enable the strengths of the founder to be utilized, to ensure that the transition fits the business and the balance between founder and successor is maximized as the relationship is going to evolve.

The most frequent archetypes are the following:

Founder to chairperson

This avenue can provide sustainability and credibility and enable the founder to maintain respect and influence. In the case of Bill Gates, he left the CEO position of Microsoft in 2000, but continued to be very engaged over the years, as the chairman and chief software architect, until 2006, working full-time. He has not conducted day-to-day operations since 2008, and remained chairman until 2014, and has also remained a strategic adviser to Satya Nadella. Nevertheless, the position of a chair is hardly compatible with the strengths of a founder that are inclined to creating, innovating, or performing. This course of action is effective when the founder is sincerely keen on becoming an externally-focused representative of the company and an internally-focused course of action. Without a clear scorecard and boundaries, the position may degenerate into a symbolic position that will strip the founder or weaken the new CEO of authority.

Strategic adviser or nonexecutive director

In cases where the founders wish to still be engaged but not in the daily operations, this model has the capability of preserving the institutional knowledge, industry expertise, and cultural continuity. It works especially well when the founder prefers to act as a sounding board to the CEO as opposed to being a decision-maker. As an example, soon after Salesforce purchased Slack, the founder and CEO of Slack Stewart Butterfield exited the organization, preferring to work as an informal advisor. He did not lose his respect in the transition, yet he was able to provide guidance throughout the integration, but more than that he concentrated on his personal life than board meetings and decision making. In a different scenario, one founder CEO who had taken up a nonexecutive director position remembered that he had advised his successor to take his own decisions. "I told him, 'It's becoming yours. Own it. I like whatever you do, agree with you.'" Such a recommendation will seal legitimacy and encourage true independence of the incoming leader.

Founder to functional role

It is a good direction in cases where the founder is extremely knowledgeable in a certain field of product construction, say, or leading scientific or commercial policy. It will allow the founder to remain close to her loves and leave room to the CEO. One of the founder CEOs who served as the CEO and later CTO told us that to him, it was essential that the CEO had faith that "I would sacrifice my job and would not work against him." "And I had to trust his path. We also communicated five or six times in a day, to keep in touch." Oracle Larry Ellison pursued this path after retiring as CEO in 2014 to become CTO, and is still heavily involved in product and technology strategy. This arrangement comes with a lot of reporting dynamics as now the founder will be reporting to the new CEO. Sometimes the model is perceived as performative or even political, which undermines the collaboration that it is supposed to facilitate. It is vital to set expectations of the roles, have trust between the founder and the successor and be proactive in ensuring that they agree on the decision rights.

Founder exit

Governance-wise, a complete separation is the most ideal solution, which provides the new CEO with complete authority in making decisions, as well as providing a fresh start. It is able to produce a cultural as well as strategic vacuum. It is a route that usually attracts founders who are prepared to take on a new challenge, those who want to rest their weary head after years of intense effort, or whose own personal development is elsewhere. In other instances there is the need to make a clean break based on poor trust with the board or inappropriateness with the changing requirements of the business. Whatever the reason, prior to the departure of the founder, the company has to strategize to have a continuity of the culture and recruit or advance a qualified successor who can lead the company in the right direction with hope. In cases where possible, the overlap between the two leaders can be beneficial to be built.

It is difficult and unlike any other CEO transition. Founders tend to be tied emotionally to the company, they are trusted significantly by the team, and would be reluctant to completely step down. Consequently, newcomers have a rare combination of external pressure and internal suspicion. This is what they should have to do, and how entrepreneurs can make the road easier.

Low ego, high confidence

The heirs must have silent confidence. They need not be afraid of demonstrating themselves too fast. Several feel afraid of appearing as a place-holder or a safe bet, and that may lead to overcompensation: the attempts to impress too much or to make sure not to be associated with the legacy of the founder. Most successful successors are known to accumulate trust over time and make considered movements and not bang-noise moves. The founders can be of assistance by providing both public and private early and frequent endorsement. The demonstration of trust renews the successor system of detecting threats and thus the successor will be more committed to leading.

Cultural empathy

Nonfounders CEOs are usually more focused on systems and performance, but it is also important to note that they should be able to plunge into the company culture. There are rituals, rules which are not written down, mythology which has been passed down, which the successor might not be aware of. The founders are supposed to assist in deciphering the meaning of important traditions and symbols which were usually made unconsciously. A description of the cultural DNA of the company allows the successors to maintain a meaning but gives different forms.

Stakeholder savviness

There are several centers of power that the successors need to deal with, which include the founder, the board, and the team. Board meetings may also turn into referenda about their legitimacy and can lead to hyper vigilant decision-making and successors who second guess themselves rather than make decisive decisions. In that regard, founders can make the CEO position more human by telling their early failures to future successors and reminding them that boldness and sustainability sometimes have to be traded off.

Complementary, pertinent strengths

Successors are not to be mere complements of the founder but they should bring something that the company requires at this stage. Frequently that contains additional framework, training, or scaling expertise, yet the point is that everybody in the room agrees that such modifications are a clear and timely update. The next in line completes the vacancies of this growth stage without attempting to imitate what the founder is unique about. One of the CEO successors spoke of how he and the founder deliberately embraced their differences. "We knew we were like mutually complementary," he said to us. "He is a technology-loving entrepreneur who I can assist him in bringing in 150 people and designing the process behind it. In case I were an engineer we would not need each other." One thing that founders can do is to name the successors strengths expressly and emphasize the strengths, particularly those that have not been used in the team, and these strengths.

Decent change leadership

The successors have to understand what to retain and what to develop and initiate change progressively without disenfranchising the people who established the business. The founders can assist their successors by telling them that change is a sign of strength, rather than betrayal and assist in contextualizing a narrative of evolution to be a part of the growth story of the company.

Emotional resilience

After founders, successors usually have to take the strains of leadership without the bonding that founders had already created. The outcome may be early and excessive isolation. It is crucial to be able to resist such loneliness and find a trusted support to remain grounded and efficient. One way that founders can assist is by checking-in and listening (not advising), occasionally. The compassion which the founder has may be a mute yet a strong anchor to the successor.

In too many instances, new CEOs do not realize how difficult it is to succeed a founder. They believe that their new CEO status comes with power. It doesn't. By making such a wrong judgment, successors are able to undermine a promising transition. These are four of the most prevalent and most expensive mistakes that we see successors make and ways to avoid them.

Claiming a fresh start prematurely

Other successors come with a project to "professionalize," which usually entails deciding to discontinue the existing systems, change the culture or even get rid of long-term lieutenants. However, informal processes, symbolic rituals, and structured chaos can make founder-led companies succeed. Going too fast may lead to the erosion of the trust and energy that helped to achieve initial success. And ask me what you would change, Before you ask me what you would preserve? The first 90-120 days of successors should be a time of listening, observation and decoding the unwritten rules. Before rewriting the culture, they ought to shadow the founder, consult long-term team members and know the operating code of the culture. Shock can be reduced by introduction of changes in phases.

Minimizing the ongoing impact of the founder

Although the founders have no official title, they may still have significant cultural authority and emotional power. A good example is Dell Technologies. Michael Dell, the company founder resigned as the company CEO in 2004, and still remains the company chairman, with his former deputy Kevin Rollins as his successor. Only three years down the line, following a spell of poor company performances, Dell has come back as CEO and has served in the position since then. He has determined the most significant decisions taken by the company, such as the decision to go private in 2013 and the decision to go public in 2018. The successors ought to question, "What will be the impact of the founder after transition? Who is really in the power in the organization?" They ought to win the approval of the founder both in public and the private and find founder loyalists that can serve as champions of transition and cultural bearers.

The inability to utilize the founder as a strategic partner

Most of these successors consider the transition as a mere replacement in terms of operations without paying attention to the emotional and relationship dynamics involved. To the majority of their founders, the company is a personal identity and work of life. In the event that this is not realized, opposition is nearly guaranteed. Others become too fast to deviate and become too fast to be independent, or to avoid war with the founder. Others pretend to conform and this will work against them when it is time to make tough decisions. Rather, the successors must question, "Is the founder really entrusting me with the leadership? Am I admiring and respecting this individual enough to establish something together? What can I do to win and maintain the trust of the founder in the long run?" The most effective ones are those that bring the legacy of the founder and knowledge of the institutions to the new story of leadership and establish a mutual respectful relationship.

Ignoring founder peculiarities

What seems to be a weird character may have been an obsession with a particular customer or dislike of certain measurement tools but might actually mean a certain cultural myth. The question that successors need to pose is, What are the habits or preferences of the founder actually? Before dismissing legacy behaviors, they should have to devote time to comprehend the meaning of such behaviors.

Internal successors can flourish with the correct support, even though the choice procedure itself is a primary element, particularly in founder-led business, in which a cultural fit is of equal significance to technical adeptness. The founder of one of the financial services companies was a legend in the business. His friendliness and modesty had been fundamental to the moveability of the company, especially in the purchase of mom and pop brokerages, where values and credibility were vital elements versus spreadsheet. We had been invited to interview potential employees to fill the COO position in the company, including the succession of the founder. One of the finalists was an excellent strategic operator of high profile with a great pedigree but his boisterous style and ego would have brought with it a lot of cultural risk. We instead suggested a softer leader who was not so full of himself and whose skills would balance that of the founder; he was dependable and disciplined and oriented towards the team first. He joined in as COO, he was promoted to become president and later became the CEO. This hire led to the success of the business. The founder shifted to board chair where he served with a lot of enthusiasm as a cultural ambassador and an M&A consultant. The sponsor of the company had eventually decided to re-invest instead of leaving, which is a statement of the credibility of the leadership bench and the transition itself.