The Founder’s Dilemma

THE FOUNDER’S DILEMNA

Small entrepreneurial companies have been the foundation for economic growth in the United States for generations.  Most of our new employment opportunities are created by such companies.  The founders of these companies are enterprising, risk taking energetic motivating visionaries without whom our global leadership would not have happened.  Most of the technological creations that have driven our success as a nation began with the inspiration of these founders’ leadership.  They draw the talent, the capital and the organizational genius together to create the great companies of the future.  Without them our nation would not be the economic giant that it is. 

There comes a time when the founder realizes that a change in their role is necessary or appropriate.  The fundamental question at this point is what is the right course for the company?  Is it to provide for succession planning or to explore alternative opportunities such as a sale or merger with another entity?  When succession planning is the chosen route there may be legitimate concerns about the viability of the business without the founder. The resolution of this dilemma raises issues at both the management and board levels.

COMMUNICATION PITFALL

The challenge of succession planning is compounded when the firm is run by the founder.  There is the added complexity that the firm developed out of the thinking, creativity and drive of the founder. Entrepreneurial founders see themselves as excellent communicators. However, in most cases, such leaders are only partially right. They do tend to present their vision and mission compellingly. On the other hand, they treat their colleagues and employees as if they were arms and legs. That is to say, they have a thought and assume their followers have heard and understood. When we move a hand, we don’t have a conversation with it. We think and the hand moves. Entrepreneurial leaders frequently  make these assumptions with their people and hence feel they have communicated superbly, while their subordinates are left wondering what they want, why they want it and would they do the same thing if the founder were not there?

TALENT INTEGRATION

Additionally, bringing on new talent that can strengthen the management team is complicated by the frequent fact that some of the original team members hold positions that may interfere or compete with the new senior talent.  Founders can be so grateful to those who join them early on that they have a hard time recognizing that many of their original team is now out of their depth as the company grows in size and complexity. Hence, they don’t provide the proper support and guidance to their core group and they don’t change their roles sufficiently to enable the challenged team members to succeed. These people may have been indispensible at the outset, but now their roles and performance requirements have changed and they may lack the critical competencies necessary to succeed in the new environment.  Understandably, this group feels entitled to stay in the inner circle of leadership even when they are no longer able to perform the job required.  Thus, the founder’s core group which was instrumental to the initial success of the enterprise can anchor it in the past and thwart its continued growth.

LEADERSHIP STYLE

Founders also frequently suffer from attachment to the heroic form of leadership. They love to be the one to save the day. Also they have a hard time believing that others around them can fully understand how to protect the original franchise when things seem to go wrong.  This leadership style may well sabotage the new leadership and the trust in them by others.  

CHANGE MANAGEMENT

When founders decide the role of leader is no longer appropriate for them, or the Board decides on a change of CEO, the organization is often reluctant to accept the disciplined methods of a new leader. The first response of the members of the organization is either grieving the loss of the founder or relief and delight, but in either circumstance there is often underlying guilt and remorse over the removal of their former boss even if that individual stays on in a significant capacity. Also as new structure and discipline are implemented, many miss the things that attracted them to a start-up in the first place and fear they are now to be lost in a bureaucracy. They resist new policies and procedures as evidence of creeping bureaucracy.  It is often useful to have an outside coach at this time to discern whether this is simply a default to the muscle memory of how things have always been done or is a person truly being obstructive and simply not on board with the new management team.

BOARD ISSUES

The challenges of succession planning are no less important at the board level.  Years of the experiences of boards, of start-up companies and investors in those organizations has shown how delicate a process it is to transition from an entrepreneurial organization to a more sophisticated professionally managed enterprise.  The board of directors of small and mid-size companies often includes members lacking the depth of experience of seasoned directors and who need support in understanding their proper role. In privately owned companies, many directors sit on numerous boards of companies.   Hence, their attention is fragmented and they have little time to commit to any one of the companies.  By providing the appropriate oversight and guidance to management, outside advisors can enhance board functioning and prepare the company’s management to understand the most effective ways of supporting the directors of their companies.  Often additional difficulties surface in aligning the perspectives of corporate directors with the senior management of the companies they serve. If the two are out of alignment, the dissonance that surfaces quickly erodes trust and confidence which can result in lack of clarity around mission and direction.

GOVERNANCE –V- MANAGEMENT RESPONSIBILITIES

Peter Drucker was right when he said that sometimes the line between governance and management needs to be fuzzy so that the unique skills of a director can be applied to specific management issues. Nevertheless, there does need to be a line drawn so the governance and management issues don’t become confused. In small companies often (and in most companies on occasion) a director needs to cross the line and perform a management role. It is essential in such cases, that both the board and senior management acknowledge the need and agree in advance that a director will play a management role for a specific reason for a specific time. The interim nature of the requirement may draw on an individual director’s abilities to deal with a particular customer, an issue of finance or deal-making, an operational issue, a matter of technology or of human resources, or even a regulatory or other legal matter.

BOARD COMMITMENT AND EXPERTISE

The demands of boards in the twenty-first century require much more focused time and attention than appeared to be true in earlier eras. Hence, board members generally and private equity partners in particular need to be careful that they limit their directorships to a manageable number of boards. Otherwise they cannot possibly understand the complex issues facing most companies. It is also true that more directors need to offer more than a generalist’s perspective to their company. Directors need a depth of industry knowledge; an ability to spot the right managerial talent for leadership roles; and to be great connectors both with the marketplace and with other skills and capabilities needed for the company’s future growth. They should be able to spot synergies within an industry and within a marketplace. They should bring expertise in technology, an understanding of obsolescence, the competition, geographies relevant to a company’s marketplace, regulatory issues, and, of course, financial acumen.  This allows them to have an accurate view of the big picture on both a macro and micro basis. 

A strong director is an individual who can see possible pitfalls and spot potential opportunities.  Such directors can add value by simply asking the question of management: “But, have you thought of …?” Management members often get tied to businesses that the company should exit, and a good director will challenge adherence to a business where there is little promise and wasted management attention.

SUCCESSION –V- SALE OR MERGER

An honest independent assessment is required to assess the opportunities and risks for the ongoing business and whether the company may be better off as part of a larger more integrated organization.  Whether it is determined to proceed with a sale or merger or to continue as an independent entity the other significant issue that develops is for the board and management to uncover unrealized value hidden within the enterprise. Any corporation of any size has within it skills, capabilities, channels, facilities and the like that are not being fully utilized. In some cases, it is intellectual property or client relationships. Whatever the hidden opportunity, an outsider’s objectivity permits them to see what the insiders are missing. The key to future success, either in M&A situations, lift-outs, or restructurings or repositioning, is to have the ability to spot hidden opportunities and know how to realize the value of that opportunity.  This will yield outstanding returns to all of the company’s stakeholders.

It is only when all these issues are identified, evaluated and successfully managed that the Founders Dilemma can be dealt with in the most appropriate manner.

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