Founder-CEO Succession

My initial research on Founder Frustrations focused on Founder-CEO Succession, examining the events and circumstances that increased or decreased the chances that the founder-CEO would be replaced as CEO.

Not surprisingly, I found that founder-CEOs are much more likely to lose their jobs when their companies perform badly, as is also the case with CEOs in large public companies (on whom past academic research on succession has focused). However, my core finding was that, in contrast to large-company CEOs, founder-CEOs are also much more likely to lose their jobs as CEO when their companies perform very well, a finding I term “the paradox of entrepreneurial success” in my academic paper on the subject. Founder-CEOs whose companies had middling performance (i.e., not bad but not great) were the most likely to remain CEO.

In the August 2005 issue of HBS’s “Working Knowledge,” I was interviewed about this and related issues. One pertinent excerpt from the interview:

Typically, early in the life of a company—when it is developing its first product or service—the founder who conceived of the idea and began developing it is the perfect person to lead the company, to ensure that it will be able to succeed at hitting the core milestone of completing initial development. However, when that milestone is reached—when the founder-CEO has successfully led the company in its most important task—the chances that that founder-CEO will be replaced also increase dramatically. 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.

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, they’ve grown to like the CEO position, and the success that they have enjoyed so far makes it much harder for others to convince the founders that they need to be replaced. However, it is precisely their success that has increased the need to replace them at this point.

The papers and cases that have come from this research so far include:

My follow-up research is now focusing on post-succession outcomes, examining how the timing of succession — and whether the replaced founder-CEO remains in the company — affect company survival and growth. Here’s an excerpt from the Working Knowledge interview regarding this issue:

…This is another way that founder-CEO succession can differ dramatically from large-company CEO succession. In large companies, after the CEO is replaced, that person almost always leaves the company. However, 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. However, 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.

From the new CEO’s perspective, it can be very hard to come into the company while your predecessor—the founder who used to be CEO—is still around. This is particularly true if the founder’s new role is chairman of the board, looking over the shoulder of the new CEO. It gets even more interesting if, in addition to becoming chairman, the founder has taken an executive position below the CEO, for instance, as chief technical officer. In that case, the new CEO is both “reporting” to the founder-chairman and having that same founder-CTO as a direct report. Taking over a company is quite a challenge for any new CEO, but doing it in that kind of situation brings the challenge to a very different level.

(Note: This was the situation facing Wily’s board and incoming CEO in the case I co-authored with Henry McCance.)

Posted in founder-CEO succession
5 comments on “Founder-CEO Succession
  1. Anonymous says:

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  2. Anonymous says:

    This is great information. Congrats on compiling it. This is often the topic of discussion that is being held regularly in the non-profit sector as well. Have you looked into that area with your research? If not, it may be something you would want to explore.

  3. Anonymous says:

    Your Blog is very interesting and true. As the founder of a company, i struggle with the concept of not being the CEO; however, i do concede that my talents are best used as strategic and visionary; not necessarily running the company day to day.

  4. Brian Halligan says:

    This is really interesting stuff.What would be more interesting is research on what happens. The following scenarios would be interesting in a quant-based study:1. Founder terminated in startup doing poorly. Outcome versus what happens when they stay on.2. Founder terminated in a startup doing well. Outcome versus what happens when they stay on.3. Founder moved to chairman in a startup doing well. 4. Founder moved to a line manager only in a startup doing well.5. etc.You get the picture.Brian.

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