Transitioning to a ‘Professional’ CEO: When, How, Why

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By James Brocket – Managing Partner, London –

Several years ago I was introduced to a founder/CEO of a great software business – it was still at a relatively early-stage but had great technology and some great customers that were heavily engaged with the product which solved a very real problem for them.  I was introduced by the investors who, in this case, had a minority stake and little real power, only influence, over the founder.

The company really needed professional leadership and the Board had resolved that the time was right to find a new CEO.  Everything was set, and all that was needed was the founder/CEO to get the search for his successor underway.  In the end, he changed his mind, went against the wishes of the Board and remained CEO.

It’s rare that a founder of a tech business ends up being the right CEO for the company in the long-term.  For every founder/CEO that makes the transition successfully there are hundreds that are just the wrong people to take the company past a certain point.

Very often it’s the investors that make the call to change the leadership of the company, or initiate the process that results in this as the inevitable outcome.  However, in the past few years, investors have become much more reluctant to do this.  To maximise the chances of a founder staying on once a new CEO is appointed, investors will generally take far longer to try and ensure an orderly transition where every stakeholder is completely aligned.

No two situations are the same, but over the years I have seen a great many companies miss their chance by not confronting this thorny issue.  The market moves fast, especially so today, and the window of opportunity for significant value-creation is short – arguably measured in quarters, even months in some sectors.  Who would want to be 2-3 quarters away from being ready to IPO in the ad tech space right now?

At the risk of being accused of making sweeping statements, in my experience, the founders of European tech companies have a tendency to behave fundamentally differently to the majority of their US counterparts in three key ways:

1. High emotional involvement – There’s nothing wrong with this.  Indeed a high degree of attachment is important, but not at the expense of objectivity.

2. ‘One shot’ syndrome – European founder/CEOs can tend to feel that this is their one shot and they had better make the most of it.  The statistics show they are probably right.  U.S. CEOs seem to view their current CEO role as being a step on a journey, rather than the final destination.

3. Think like founders not shareholders – Often, founders behave as if other shareholders in the company have a different, and sometimes opposing, agenda to them.

Succession is a very complex issue which is impacted by a great many environmental, economic and human factors.  For example, it’s hardly surprising for a founder/CEO to start to behave differently when their stock position has become so diluted that it becomes impossible for them to share the same agenda as the major shareholders – a situation much more common in Europe than the U.S.  Where this is not the case, and founders retain a significant stake, their interests should be ultimately aligned with all shareholders and focused purely on making the right decisions to maximise the value of the business.  This inevitably involves them taking a step back and analysing their strengths and weaknesses in much the same way as they would naturally do with their team.  If they did this, honestly and objectively, then a great many of them would take the lead in the process to hire and transition to a new CEO.

As a founder, it’s obviously very difficult to be completely objective about “your baby”, so this is often where the Chairman comes in.  I never cease to be amazed at how few European companies have “proper” Chairmen – someone with real experience in growing and scaling a business – who can be the ultimate arbiter determining the right course of action for the good of the company, while also balancing the competing agendas of different stakeholders.  The Chairman is only (normally) part-time, and as a result their role can often be overlooked.  However, a good Chairman is a critical part of the top-team and the right hire made in the role can be truly transformative for a company.

VCs often used to refer to the term “3 CEOs to IPO”.  Doubtlessly, this was taken too literally by some but it’s very rare that the founder is “the man for all seasons”.  There is an art, possessed by only a few, to knowing when the time is right to bring in someone better qualified for the next phase the company is entering. If you don’t possess it, then make sure you hire a good Chairman and build a great relationship with them.  Be honest and open and hire someone who can mentor you and give you the tough love that you need.  Much better you do this proactively now, than leave it until it’s too late.

The CEO I referred to earlier is still running the company.  However, it is now flatlining, his good people have left, and his main competitor is now way ahead – aided by a former senior member of his team.

Momentum is precious, difficult to build and easy to lose. Once you have it then it must be maintained which requires effort from the best people you can hire in the key positions in your organisation – even if that means replacing you.