Founder vs Hired CEO
by Matt, on 7 Jan 2020
Many entrepreneurs successfully lead their businesses for years, from inauspicious beginnings to million or even billion-dollar turnover. However, it’s not uncommon for shareholders to bring in an outside CEO to run the business. In this edition of SPT, we offer some thoughts on why this situation arises as well as the challenges and opportunities encountered by hired CEOs as they take over from the founder.
Why does this happen?
There are generally three reasons why an outside CEO is brought in to replace the founder of an early-stage business, two driven by shareholders and one by the founder themselves.
The skills it takes to be a founder are quite different from those it takes to be an effective CEO. And, although many entrepreneurs have the unfortunate tendency to think they are the same or that they can be equally good at both, they typically are not.
Most founders are ideas people with a strong understanding of what their product is supposed to do and whose needs it is designed to serve. This is actually the role of a Chief Technology Officer (CTO) rather than a CEO.
While this doesn’t matter during the early days of product definition and proof of concept, it becomes a more significant issue as the business grows and needs both a strong CTO and a strong CEO.
Founders can certainly learn to become managers and CEOs, but, under pressure to achieve financial success, it’s often much easier for shareholders to bring in a CEO with the required abilities and experience, allowing the founder to focus on the technical stuff that he or she does best.
Inexperience leads to mistakes, and while most companies can tolerate a few minor mistakes along the way, experienced leadership is eventually needed to avoid more serious – and potentially terminal – errors from happening.
Research conducted by business school professors at Duke, Vanderbilt, and Harvard revealed that founder-run companies are less productive and more poorly managed than those whose CEOs didn’t start the firm. Companies led by the people who founded them were, on average, 9.4% less productive and had consistently lower management scores (which rose once the founder-CEO was replaced).
Another shortcoming in many entrepreneurs is their ability to make decisions in the face of uncertainty, especially under time pressure. Scientists and inventors spend days – even years – in pursuit of the "right" answer. In management, it is often necessary to make decisions based on incomplete information, picking what appears to be the "best" answer from available options.
Third, but often most important from an investor’s point of view, many founders refuse to acknowledge their own shortcomings and won’t accept coaching. As an inexperienced CEO, there are many things you don’t know and, critically, that you don’t know you don’t know.
If you’re not willing to listen to the more experienced voices around you, it’s unlikely that investors will extend you the time (and funding) to remake all the mistakes that could otherwise be avoided.
Irrespective of how much of the company they still own, founders always think it’s their company to run. In reality, as soon as a founder raises money from investors it becomes a partnership.
Provided things remain amicable, most investors do act as partners with the founder, providing advice and support to help grow the business. But if the company runs into performance problems, that relationship can quickly change.
By contrast, from a hired CEO’s perspective, it’s the board’s company that they have been chosen to run. They will be more likely to go along with directions given by the board that hired them and exhibit less resistance to changing things that have been in place since the company was formed.
This is not to say that shareholders will always bring in a "yes (wo)man" to ensure the company is run the way they want. Directors will usually recognize that the founder is the glue that holds an early-stage company together, not to mention best understands its products and people, so such a change will not be made lightly.
Some founders simply don’t want to be CEO. They are happiest when coming up with ideas and designing new products and quickly grow tired of the administrative or people-facing aspects of running the company.
Nevertheless, even when they are self-aware enough to recognize their disaffection with the role, it can be hard for some founders to step aside. This is often the fault of family, friends, or peers who fail to understand the difference between starting and running a company and brand the poor founder a weakling – or worse, a failure – when they propose replacing themselves at the helm.
In practice, identifying and recruiting their successor in an organized fashion is likely to be the greatest gift such founders can give to their business, not to mention an act of great courage and strength.
What Happens to the Founder?
Although many great founders turn out to be less-than-stellar CEOs, they still have an important role to play. Whether they move into the role of CTO or take a board seat, many founders work effectively with their hired-in replacement to help build the business together.
Does the founder sometimes end up getting kicked out of their own company? Yes, for sure. If they fail to stay involved, stop generating ideas, become adversarial to the new leadership, or otherwise get in the way rather than being helpful, then shareholders will have little choice but to force them out.
Challenges faced by a hired CEO
Independence from the board
The challenge for many hired CEOs is to establish that, although they didn’t start the company, it is their company to run. It’s not the board’s job to run the company and the directors are not the CEO’s boss.
This can get particularly tricky when the investors also have significant expertise in the company’s domain of operations. Their tendency to micro-manage or question the CEOs decisions can quickly deteriorate into over-reach if not handled appropriately.
Having an independent chairman of the board can be a great help in this sort of situation, since they can intercede on behalf of the CEO and ensure appropriate boundaries are maintained.
CONNECTing WITH purpose
Whereas a founder should (hopefully) have established the company and hired staff based on a defining purpose and mission, an incoming CEO must try to connect with that purpose or redefine one for the entire organization.
If a purpose statement has never been written, it’s an opportunity for the incoming CEO to connect with the team on the deepest possible level by taking time to define the essential driving force behind their efforts.
Some CEOs are hired to run businesses built from disparate pieces, such as when investors roll-up two or more acquisitions to form a new company. In this unusual case, there is no central purpose around which the business has been built. Instead, the CEO is challenged with back-calculating a common denominator that unites the assembled pieces and people. If one cannot be found, it is likely that the company will need to be restructured before it can successfully and sustainably grow.
Many businesses, especially those that are still small, are built around the founder and other early hires. Consequently, the company culture is heavily influenced by their personalities and ways of working.
A new CEO inevitably brings a change to these inputs and if their personality and behavior is very different from those of the founder, it will take some time for the organization to adapt.
In practice, considerable attention should be paid to this issue when selecting a candidate for the CEO role. Unless changing the corporate culture is an expressed objective of making the CEO switch, the recruiting team should be looking for someone who will fit within – or at least not completely disrupt – the existing culture.
If the venture has an established organizational structure in which people understand their roles and hold each other accountable, things should continue to run smoothly. People know their responsibilities and work accordingly.
If not, it’s vital that at least management responsibilities get quickly and clearly defined and documented. The CEO can then set expectations for each of the key employees and board members.
Each CEO has their own preferences as to how responsibilities and reporting are established within the organization, so defining and communicating these is an important early step.
Along similar lines, some of the company’s early hires will likely have been drawn from the founder’s business contacts and friends. While this doesn’t necessarily mean they will head for the door as soon as the founder is replaced, it can lead to a reevaluation of the position from both sides.
In most cases, this is entirely healthy. If the employee isn’t well-suited for the role, addressing their shortcomings is best for both the individual and the company.
Similarly, if the employee’s success or suitability was heavily predicated on their relationship with the founder and does not easily translate to their new relationship with the incoming CEO, a change is likely on the horizon.
It is incumbent on the incoming CEO to delve into the history of the company and understand how each of the key employees came to join. This will uncover which, if any, of the team members might have particular ties to the founder, allowing the CEO to anticipate and address the issue.
Trust and respect
At a broader level within the organization, the new CEO must earn employees’ trust and respect. There will inevitably be some skepticism, especially if the change in leadership was triggered by shareholders rather than voluntarily by the founder.
The introduction of a ‘new guy at the top’ will often be seen as a harbinger for more widespread change, and the fear of change can quickly lead to negativity.
Rather than giving the new CEO a chance to settle in and get comfortable, staff immediately assume the worst and begin planning rear-guard actions to defend against unwelcome changes.
The best medicine for this phenomenon is open communication. Both the founder and incoming CEO should spend much of their time in conversations with staff, reassuring them, explaining why the change is being made, and being clear about what else is going to happen in the ensuing weeks and months.
Obviously, if serious changes are needed in order to right the ship there’s no point sugar-coating the situation. Once the initial shock has worn off, employees are usually appreciative of clear communication from the top, even if the news isn’t great or what they had hoped to hear.
Advantages for the Incoming CEO
Thankfully, it’s not all bad news for the incoming CEO. There are some definite advantages to being the new kid on the block.
For some period of time – usually at least the first ninety days – the CEO can ask "dumb" questions without being judged. Even if she has plentiful domain expertise, there’s no harm in adopting a novice mindset and asking "why" at every sensible opportunity.
This presents a great opportunity to flush out things that are being done a certain way "just because". It’s amazing how suboptimal and sometimes downright peculiar practices can become "the way we do things around here" just because that’s how someone decided they should be done long before the current employees were hired.
Asking questions also provides an opportunity for the CEO to demonstrate their willingness to listen and openness to new ideas.
Employees appreciate being heard and such dialog can establish a constructive platform for continuous improvement. Employee-generated ideas are often highly effective pathways to enhancing business performance.
This initial grace period is also a good time to challenge projects and processes that might have been considered ‘sacred cows’ while the founder was on seat. A degree of caution should be exercised to avoid this deteriorating into complete chaos or undermining the company’s ability to conduct normal business, but in principal it’s a great time to revisit how things work and why.
Advantages for the company
Hired CEOs can be brought in with very different compensation packages, performance targets, and incentives.
Whatever equity position they are given (stock and/or options) will be tied to the then-current enterprise value, incentivizing them to drive the company to a much higher valuation if they are to take home a nice check.
And, if the CEO is financially independent - as opposed to almost broke, like many founders – they’re less sensitive to taking risks that could have big downside as well as attractive upside for the company. In contrast, a founder who has invested everything and worked hard to get the company to this point tends to become increasingly risk averse in an effort to protect the on-paper wealth they have already created.
An incoming CEO can provide a welcome boost to areas in which the company and its existing leadership team are weak. For example, the new CEO might have a stronger understanding of the market, greater experience in launching new products, proven marketing and sales skills, or comfort in dealing with current or potential investors.
Since the CEO is responsible for driving the company’s growth, his or her objective should be to set strategy that is aggressive but realistic. If the founder had under- or over-shot the mark, the change in leadership represents a perfect time to recalibrate and reset company strategy.
Correspondingly, the new CEO should be empowered to make changes at the management team level if they are needed to effectively deliver the revised strategy. Laying out a new plan but continuing with the same cast of characters often means the changes are merely cosmetic and that the underlying status quo will prevail.
THINGS TO PONDER
Besides taking a look at other resources for running a growing and scaling company, here are some things to ask yourself if you are a founder CEO:
- Do I want to continue in the CEO role, or would I prefer to hire someone with complementary skills and reassign myself into a role where I can be more effective?
- If I did want to step aside, what role would I want to assume and what would it take to make that happen?
- What would be my biggest concerns in allowing someone else to run the company and how might those concerns be mitigated?
- What would others inside and outside the company think or say and how might I explain the decision to them?
If you are an incoming CEO taking over from a founder, consider:
- What are the biggest challenges you face in taking over at the company and how might you tackle them?
- Who will be most concerned or affected by the change in leadership and what steps can you take to set their minds at ease or effectively address their concerns?
- What opportunities does the change present for challenging and improving the way the company does business?
- What skills and experience do you bring to the company that strengthen its ability to succeed and how can you begin demonstrating that value to team members who might be skeptical about your appointment?