Fundamentals of a Successful Founder-CEO Succession: Advice for the Board

In response to macroeconomic and market uncertainty, investor-backed businesses have been battening down the hatches, cutting costs and scrutinizing the broader employee base as well as those at the helm of the organization. In a tight capital market, investors want companies to rein in unlimited spending on growing user volume in favor of profitability. Founders are being pushed to embrace business fundamentals – and investors and boards are considering whether founders have what it takes to lead in the current environment. For some, the question is whether it’s time to transition the company from being founder-led to “founder-inspired.”

The process of examining whether the founder is the right person to remain in the chief executive officer (CEO) role is undoubtedly a sensitive endeavor. Often, investors and boards put off or fail to successfully facilitate this critical leadership transition. However, the stakes are too high and boards can’t afford to wait when a CEO is struggling, since the risk is heightened that an organization won’t be able to recover.

Based on decades of experience researching CEO performance and counseling founder CEOs and boards, here are six critical steps for navigating this transition:

Align on what the business needs in the next CEO.

It’s all too common for boards to wait for a “love at first sight” moment, but it’s critical to define the type of leader needed upfront. While some boards may look for a successor that mirrors the style of the incumbent CEO, and others may want someone who takes a starkly different approach, skewing towards either without a proper assessment of organizational needs and goals is a mistake.

The board should build consensus on the ideal CEO profile through rounds of discussion to determine the necessary experience, leadership characteristics, and capabilities – like strategic thinking and ability to drive results, lead change, and collaborate. The process should also consider strategic issues, such as whether the new CEO will recruit a new senior management team or work with the existing team, and whether they can serve long-term.

Involve all stakeholders.

Support from the board, management team, employees – and particularly the founder – is indispensable. To ensure the message of new leadership lands well, diplomatic communication must be at play from inception.

Especially when approaching the founder, the board should select one member who is highly trusted by the founder and can have an open, transparent dialogue about their tremendous strengths and contributions thus far, and the new leadership direction the company needs to take. Having the founder’s blessing will help make the transition less disruptive and amplify the potential synergy between the incumbent and incoming CEO.

Identify a new role for the founder.

Depending on strengths and interests, a founder can wear many other hats in the company once they step down as CEO. For example, a technical founder could be a chief technology officer, while a highly intellectual founder could become head of strategy. Sometimes, the founder’s new title should be decided before the search to remove a potential obstacle to candidates seeing themselves in the role. Directors should also ensure that the founder is fully committed to their new responsibilities to avoid a scenario where they hope to eventually return as CEO; data shows companies have poorer performance (three-year post-transition) when founders depart, then return to the CEO role. Beyond an operating role, the founder can also serve as chair and use their name to support the company. In fact, when done properly, research shows that founder executive chairs fare better than non-founder executive chairs.

Have clear roles and responsibilities to prioritize the search.

Identify who will take the lead, as the search will be most efficient if one board member spearheads. This board member must conduct interviews, refine search requirements, actively liaise with candidates, and maintain constant communication with the full board. The board should also consider internal candidates alongside external ones. This gives them a broader option set and increases the odds of retaining key internal candidates, if desired.

Choose a notable, persuasive closer.

Arguably most important, the board should identify a “closer” who can help seal the deal and convince a dream candidate who may need more coaxing to accept the offer. Select the board member who has the most industry clout and name recognition to help excite a candidate about the opportunity. The closer should be on standby to jump in as the search is coming to a close.

Fill the transition period with transparency and collaboration.

Communication is the foundation of a smooth transition. The board should communicate the new CEO’s style, strengths, and relevant expertise to all stakeholders, and the new CEO should also be given permission to move slowly and prioritize building relationships and evaluating the current strategy. An open dialogue between the founder and new CEO is also critical to foster support and mentorship. A helpful tactic here may be to appoint a lead independent director or external advisor to monitor the relationship and help the new CEO deal with unexpected surprises and decision-making processes.

In sum, the shift from founder-led to founder-inspired is a delicate process, and there is no more difficult decision for directors than intervening when a founder CEO is underperforming. While replacing the founder is not always the solution, the key is accurately assessing the challenges, gathering stakeholder input, and acting swiftly – especially during market conditions like today’s, timing does matter for the best chance of success. And throughout it all, everyone should remember that all parties are acting with the firm’s best interest at heart.

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Jason Baumgarten is Head of Global CEO and Boards Practice; Lisa J. Caswell is Consultant; Seonaid Charlesworth is Consultant; Cassandra Frangos is Consultant at SpencerStuart

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group