By: John Wood, PFD Group, Senior Consultant
In the world of public companies this topic is known as CEO succession. Over the last few years the process has become increasingly formalized. Boards of directors have recognized their responsibility to shareholders and adopted rules of good corporate governance.
Private companies can make their own rules and many face difficult succession issues. A strong entrepreneurial founder typically possesses many skills not found in others, and they obviously know what is best for the business because they built it. However a few things can happen that cloud their picture: the business could ‘outgrow’ the founder and require a new talent set to succeed, the founder could get old… if he or she is lucky, they may decide to retire, or a founder’s heirs may sell the company or try their own hand at running it.
Well-run public companies have succession plans that span three or more levels down through the organization, and their boards are actively involved and receive regular updates. Successors for key roles may be ranked as ready to assume more responsibility immediately, in one year, or following a probationary period. Shareholder value is enhanced because the company is cultivating a crop of strong players. Unwanted turnover is avoided because these employees realize they are valued and know the potential for growth exists.
Private companies tend to have the opposite problem. The founder, perhaps unwittingly, may tend to drive off good talent – people they see as a threat. This often results in an organization with a ‘rock star’ at the top but nothing underneath, which becomes an obvious problem that must be tackled when the founder retires. These situations also cause depressed valuation should the company be sold, as there is little value in a ‘one man band’.
Boards have a fiduciary responsibility to their shareholders. In a public company all shareholders must be treated alike, and good directors understand their role as one of stewardship and oversight. Private companies may have a ‘rubber stamp’ board made up of friends and supporters that serve only the founder, not the company. It is important for friends and supporters of an entrepreneurial founder to understand that they serve the founder best if succession planning is actively pursued.
Implementing an effective succession strategy requires wisdom and foresight on the part of a founder as well as guidance and persistence from the board members. Founder’s syndrome may not be 100% curable, but it can be effectively treated.
We, at PFD Group, enjoy serving as an outside resource, sounding board, and coach to companies navigating this critical time of change and opportunity for growth.
"The graveyards are filled with indispensable people."
- Charles de Gaulle