Eighteen months ago, at the tenth birthday party for The Alloy industrial design agency he had founded, Gus Desbarats had a surprise announcement.While the staff were no doubt expecting a rousing, cheerleading speech from a proud CEO who had founded and grown a successful agency across the past, turbulent decade, there came, instead, a surprising admission. Desbarats had realised that, as the founder-CEO, he was actually holding the company back. “Nearly all founders will have exactly the same problem,” he says. “It’s a tricky situation: if you stick around too long, there’s no career path for anyone else and so your good people leave. If you sell to some toxic huge conglomerate, they come in with ridiculous growth plans and so all your people are being whipped daily to earn your final exit payment. So, again, all the good people leave and the company fails.” Desbarats knew that for his Surrey-based company to survive, he had to step aside. Despite nobody wanting the company to succeed more than him, he knew he was the single biggest obstacle to future growth. And so Desbarats put the company, which developed the BT Home Hub among many other products, into a form of employee ownership and took on the role as a mentoring chairman. This realisation that it might be you and not “them” does not always come so easily. There are some obvious examples. Stelios is still making news headlines for constant attacks on the board at easyJet, where he was chairman until 2003. He only resigned from its board last year, again acrimoniously criticising the growth plans and seasonality of the no-frills airliner. Jerry Yang, former CEO of Yahoo, fought off a shareholder rebellion until calls for his resignation became too loud to ignore. He had turned down a $40bn offer from Microsoft in 2009, a valuation which would greatly flatter the company today. Whether Groupon’s Andrew Mason similarly lives to regret not taking a rumoured recent $6bn offer from Google last year remains to be seen.
Time to grow up
For SMEs, it’s the same story. The CEO who cannot see they are the problem, is ultimately, well, the problem.
Ashley Ward, director of European Leaders, specialises in training senior executives of companies being primed for sale. He finds that, more often than not, founder-CEOs hold back talent development and curtail growth, inadvertently decreasing the value of their business. His advice that a replacement CEO should be sought, however, normally goes down like a proverbial lead balloon for an entrepreneur who probably has not realised the company they set up is now a very different entity.
“You can get away with a lot in the early days, when you’re shooting from the hip and setting things up,” says Ward. “However, if the founder continues to be the leader once the company has had to ‘grow up’, they can end up choking a business rather than driving it forward. The early days are soon replaced by a need to manage a business, to attend to the detail and to get the right people in to drive growth. The founder-CEO is very rarely the best person to achieve this.”
The “crunch time” usually comes when the company grows big enough to get outside investors, according to Ward.“
Typically these investors will be venture capitalists or individuals who have taken a stake on the basis of a very ambitious growth plan,” he explains. “They know it’s ambitious and then use it against the CEO when the unrealistic targets aren’t met. They then vote out the CEO. It’s all very acrimonious. “
If you’ve taken outside investment and you haven’t stepped aside as CEO to let in a fresh team, you can virtually guarantee you will be brushed aside.”
Although Ward says there will always be the likes of a Mike Lynch at Autonomy or Steve Jobs at Apple, these guys are notable exceptions to a business rule. Take research by European Leaders. A survey of more than 50 UK and European venture capital firms found that 92 per cent expect to replace a company founder with a new CEO. A third of investors then give the replacement CEOs a year to prove themselves.
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