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August 15, 2005

Leadership Thought: The Founding CEO's Dilemma: Stay or Go?

From the most recent issue of HBSWorkingknowlege Newsletter:

August 15, 2005

The Founding CEO's Dilemma: Stay or Go?
by Mike Roberts

Summary: Bill Gates and Larry Ellison are rare birds. In this interview by HBS senior lecturer Mike Roberts for New Business, professor Noam Wasserman explains how and why many founding chief executives find themselves replaced.

New Business: Tell us about your research.

Noam Wasserman: My research focuses on founder frustrations in entrepreneurial firms, with a particular emphasis on the core issues of organization building that cause problems for founders' abilities to achieve their goals. I've been especially interested in the pattern of succession in many entrepreneurial firms—specifically, that many founders are replaced by "professional" CEOs early in the life of the venture. My data shows that the percentage of founder-CEOs who "go the distance" is extremely low, especially in high-potential ventures. People like Bill Gates and Larry Ellison, who are able to lead their companies for quite a while, get all the attention because they are rare, not because they are typical.

NB: What do we know about why this happens?

Wasserman: In large companies, when the CEO doesn't do well, the CEO gets replaced. When the CEO does do well, there is almost no chance that person will be replaced. If he or she has led the company to success, that person is about as solid in the position as one can get.

The interesting paradox is that when founder-CEOs do really well, that also increases the chances that they're going to be replaced.

My research shows that in small companies, it's still true that when founder-CEOs do badly, they are replaced. But the interesting paradox is that when founder-CEOs do really well, that also increases the chances that they're going to be replaced. Typically, early in the life of a company—when it is developing its first product or service—the founder who conceived of the idea and began developing it is the perfect person to lead the company, to ensure that it will be able to succeed at hitting the core milestone of completing initial development. However, when that milestone is reached—when the founder-CEO has successfully led the company in its most important task—the chances that that founder-CEO will be replaced also increase dramatically. The challenges within the company change so dramatically that the person who was best suited to lead the early stage of company development is no longer the best person to continue leading the company. Now, the product has to be sold: You have to create a sales organization, manage multiple functions, deal with customers, handle more complex financial issues, and deal with a very different set of challenges for which many founder-CEOs are not equipped. Objectively, many founders might agree that the CEO's job will require skills they don't have, but emotionally, they are very attached to the companies they started, they've grown to like the CEO position, and the success that they have enjoyed so far makes it much harder for others to convince the founders that they need to be replaced. However, it is precisely their success that has increased the need to replace them at this point.

LINK to rest of article

Noam Wasserman is an assistant professor and MBA Class of 1961 Fellow in the entrepreneurial management unit at Harvard Business School. His paper "Founder-CEO Succession and the Paradox of Entrepreneurial Success," published in Organization Science in March-April 2003, won Harvard's 2003 Aage Sorensen Memorial Award for sociological research. With his coauthor, Rock Center Entrepreneur-in-Residence Henry McCance of Greylock Partners, professor Wasserman recently completed a case study about founder-CEO succession at Wily Technology. New Business publisher Mike Roberts met with professor Wasserman to learn more about his research

Posted by Becky at August 15, 2005 1:31 PM Posted to Leadership Thought