Solving the Founder-CEO Dilemma

Men’s Wearhouse’s termination of founder and executive chairman George Zimmer highlights one of the most important decisions a company, its board, and investors make: hiring or retaining the right CEO. When the decision involves promoting, replacing or complementing a founder who built the company—as Zimmer did—the decision is quite complex and the stakes are extremely high. There is a long-standing and active debate about what to do with a founder CEO once the company has expanded beyond the entrepreneurial stage. There are four schools of thought.

June 27 2013 by Randy Ottinger


The argument for the Founder/CEO

One school of thought is to support the founder CEO to grow into the professional CEO job. The best argument for this school of thought is presented by Ben Horwitz, a Founding Partner at the Silicon Valley Venture Capital firm Andreesen Horwitz. In his blog titled Why We Prefer Founding CEOs, Horwitz cites a Wharton School of Business study of 50 companies that concludes that founding CEOs consistently beat the professional CEOs on a broad range of business and financial metrics. Horwitz further argues that technology founders in particular have three core competencies to identify a market opportunity or as Horwitz puts it “find the product cycle”. This includes: 1) Comprehensive knowledge of the technology required, the competitors and the market; 2) Moral authority to throw out invalid assumptions and go into a new direction if the data indicates the requirement to do so. In a Forbes blog Jobs’ willingness to disrupt himself to go from the PC business to the consumer products business is discussed in more detail—as well as the a need for Apple to do this again. However the founder with the moral authority is now gone so the question is whether Tim Cook can and will do it. 3) Total commitment to the long term to build something significant versus put more money in their pockets. This runs contrary to Naom Wasserman’s research at Harvard Business School where he argues that, “Most entrepreneurs want to make loads of pots of money and run the show”. My experience is more in line with Horwitz. Entrepreneurs are ignited by market opportunities more than money. Examples of Founder/CEO success stories include Starbucks, Amazon, and Apple, among many others.

The argument for the Founder + Professional CEO Partnership

A second school of thought is to hire a professional CEO to partner with a founder. Reid Hoffman, Co-Founder of LinkedIn and a partner at venture capital firm, Greylock Partners, makes a strong argument for founder + professional CEO partners in his blog, If, Why, and How Founders Should Hire a ‘Professional’ CEO. Reid points to a study by Noam Wasserman of Harvard Business School titled “Rich Versus King”, which highlights that founders maximized the value of their equity stakes by giving up the CEO position and board control. Reid, in fact, made the decision that he did not want to scale LinkedIn, and that the Company would be better off if he had a professional CEO as a partner. As a result, he hired Dan Nye and then Jeff Weiner to professionally scale the company. At the core of Reid’s argument is the value of retaining the founder so as not to lose the core essence and entrepreneurial nature of the company, while at the same time providing the expertise to scale the Company through professional management. Examples of companies that fall into this category of founder plus professional CEO partnership are eBay (Pierre Omidyar and Meg Whitman), and Google (Eric Schmidt, Larry Page and Sergey Brin) among many others.

The argument for bringing in a professional outside CEO in to replace the founder

A third option is to replace the founder with an outsider. Based on the research by Jim Collins, Joseph Bower of Harvard Business School, and others, great companies have a much higher chance of success by hiring from within versus going outside to find a CEO. With that said, there are circumstances where a company has fallen off the tracks and brining in an outsider can improve business results as evidenced by a study conducted by Abacnci, Zajac and Bere . The argument goes that Founders will continue to meddle with the companies they built because, well, the feel it is their company. Still, this approach is risky, and can destroy a strong culture developed by a high energy founder.

The argument for the right leaders with the right skills at the right time

A fourth school of thought is that it is not about selecting the Founder/CEO versus the Founder + Professional CEO versus an outside CEO, but instead it is about the right leaders with the right skills at the right time. Ben Horwitz says the key to long term company success is for CEOs to be able to “find and maximize the product lifecycle”. “Finding” is about innovation, while exploiting is about execution. The question I would ask is whether you have the leaders in place with the skills to innovate and execute. Founders of companies have the ability to innovate. It is part of being an entrepreneur. They clearly fall in the top left quadrant of the 2X2 matrix below, and have the entrepreneurial drive and innovative skills required to run early stage companies. Keeping the Founder/CEO in place is in great part determined by whether the founder has the skills AND desire to learn to execute as well as innovate. On the other hand, professional managers fall into the bottom right quadrant and can over-manage a company, stunting growth and innovation. The question for professional managers is whether they have the ability to innovate as well as execute. Often the same person does not have the ability to do both, and as a result a team of leaders is required to achieve agility and scalability resulting from a combination of the ability to innovate and execute well (top right quadrant).

Observations, Insights and Conclusions

There are a number of observations, insights and conclusions that one can draw from collective experiences with leaders of various size companies when it comes to the founder/CEO decision.

  1. The founder culture matters – You need look no further than Tony Hsieh of Zappos, and the brilliance of Jeff Bezos to leave him alone, to understand the importance of keeping the founding culture intact. Bezos stated the acquisition of Zappos was in part to learn from the culture that Hsieh created. The values, drive and commitment of the founding members of a company that lead to growth can easily be squashed by a professional CEO who comes into “manage the company”. Note that some top CEOs like Howard Schultz of Starbucks, Steve Jobs of Apple, and the Nordstrom family, returned to take their businesses to the next level after hiring professional CEOS. They all found the professionals were eroding the company values and culture, leading to a decline in company value.
  2. Leadership skills matter – Either the founder has the desire and ability to develop the skills to manage execution or not. If not, then there is a need to look for a professional CEO partner. In addition, either a professional CEO has the ability to lead innovation as well as execution. If not, there is a need to retain a counterpart who will maintain the entrepreneurial culture of innovation. Often it takes a leadership team to create the skills required to be in the top right quadrant where a company has the execution capabilities to scale, and the innovation capabilities to be agile and adapt.
  3. The Founder and Professional CEO’s willingness and ability to partner matters – Even if partnering is the answer, egos can get in the way. It is a rare person like Sheryl Sandberg who is willing to take the #2 spot at Facebook partnered with Mark Zuckerberg. Founders notoriously meddle even when they are moved out of the CEO spot. It is critical to work with the Founder and Professional CEO to clearly define their roles, and to help them build a relationship that leads to the combination of skills an organization requires to grow and thrive.

  4. One size does not fit all – Not all company situations are the same, nor are the capabilities of specific leaders always a fit with the company’s situation. Ultimately it comes down to a judgment call by the Founder, Professional CEO and Board of Directors to determine the right solution for any given situation. This may be the biggest decision a company makes, and therefore the importance of this ongoing debate.

Randy Ottinger is executive vice president at Kotter International, (www.kotterinternational.com). Randy has more than 20 years of experience as an executive and senior business leader, having worked for companies including IBM, McCaw Cellular (Claircom) and Captaris. He also served as SVP for Bank of America. Before joining Kotter International, Ottinger founded LMR Advisors, which provides business and leadership advisory services to legacy business leaders. He is the author of Beyond Success: Building a Personal, Financial and Philanthropic Legacy (McGraw Hill in 2008), and has written numerous papers and articles on leadership, strategy acceleration, family wealth, and social enterprise.

Read: http://www.forbes.com/sites/johnkotter/2013/02/21/how-will-apple-stay-at-the-top-it-must-disrupt-itself/

Read: http://bhorowitz.com/2010/04/28/why-we-prefer-founding-ceos/

Read: http://www.slideshare.net/Enderdoon/founding-vs-professional-ceo-performance-analysis-in-saa-s-v1

Read: http://www.jimcollins.com/article_topics/articles/companies-need-not-hire.html