When you look at start-up to IPO it is interesting to see that most founders give up management control long before companies go public.
Choosing money: A founder who gives up more equity to attract investors builds a more valuable company than one who parts with less—and ends up with a more valuable piece, too!
Harvard did a recent study that showed that by the time ventures were three years old, 50% of founders were no longer the CEO; in year four, only 40% were still in the corner office; and fewer than 25% led their companies’ initial public offerings. Other researchers have later found similar trends in various industries and in other time periods. We remember the handful of founder-CEOs in corporate America, but they’re the exceptions to the rule.
Further in the study it also showed that founders do not let go easily. Four out of five entrepreneurs, are forced to step down from the CEO’s post. Most are shocked when investors insist that they relinquish control, and they’re pushed out of office in ways they don’t like and well before they want to abdicate. The change in leadership can be particularly damaging when employees loyal to the founder oppose it. In fact, how founders tackle their first leadership transition often makes or breaks young enterprises.
Leadership transitions in a business of any size can be influenced by and affect stakeholders. How each stakeholder perceives the process-and their role within it-will have an impact on outcomes. Perhaps the two stakeholders who often play the most central roles in this process are the incumbent, or controlling, CEO and his or her successor.
The transition from one CEO to another is a critical moment in a company’s history. A smooth transition is essential to maintain the confidence of investors, business partners, customer and employees, and provides the incoming CEO with a solid platform from which to move the company forward. A properly designed and executed succession plan is at the center of any successful transition.
CEO vacancies can be planned or unplanned; in either scenario, by the time a succession plan is needed it is far too late to start building one. Because of this, it is the responsibility of the board to make succession planning a priority, even in the face of more immediate and tangible issues. In addition to being necessary for risk mitigation, succession planning brings with it several beneficial by products:
Succession planning is usually directed by the governance or compensation committees, or occasionally a special ad hoc committee. The current CEO’s involvement varies (depending on whether the succession is planned or unexpected) with primary responsibility being the development of internal candidates. The Lead Director often acts as the single point of contact between the board and the sitting CEO on succession matters.
Some tips for the pre-planning are listed below:
i. Create a written succession plan.
ii. Conduct regular, in-depth reviews.
iii. Compare the resulting list of capabilities against the firm’s senior talent pipeline.
iv. Narrow the field to two or three finalists.
v. Implementing The Plan
vi. Assess the finalist candidates.
vii. Finally, the board deliberates and makes its final decision.
Some tips across the successful transition:
1. Begin intensive knowledge sharing.
2. Communicate with stakeholders.
3. Develop a written transition plan.
4. Share the transition plan.
5. Strengthen relationships with the board.
Managing the CEO succession process is a board’s ultimate responsibility. A regularly reviewed and closely followed succession plan is essential to successfully exercise that responsibility. The costs of short-changing this process are easy to see when companies are caught off-guard by events; the payoff is reflected in the company’s momentum as it moves from one leader to the next. In addition, ongoing succession planning helps the board to be better informed and aligns the development of the senior management team with the strategic needs of the company. Beyond its usefulness in risk mitigation, CEO succession planning contributes to the successful governance and management of the firm long before a successor is needed.
Finally, choosing between money and power allows entrepreneurs to come to grips with what success means to them. Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job. Once they realise why they are turning entrepreneur, founders must, as the old Chinese proverb says, ‘decide on three things at the start: the rules of the game, the stakes, and the quitting time.’