Stepping Up: The Transition from CEO to Chairman

I recently spent an afternoon with some of the most successful entrepreneurs I know. Between them they have founded or bought into a diverse set of businesses, covering education, financial services, luxury cosmetics, market research, telecomms management, media services and executive recruitment. Most were in their early forties and operating out of the UK.

Courtsey of our hosts, Coutts Bank, we had gathered to focus on the issue of transition in the owner-managed business. Transition, that is, from being chief executive or managing director, to the role of Chairman of their own organisation. With two exceptions, all my guests had chosen to go down that route, and were at various stages of making this happen. One of the exceptions was a self-confessed waverer. He was taking part to help decide whether or not to commit himself to this path. The other exception had recently sold up and had, as he put it, exchanged the problems of managing his business for the problems of managing his money. It was, he agreed, a nice problem to have.

Why does it matter?

In the two decades that I have been running businesses, advising entrepeneurs and serving on company boards, I have constantly returned to this central question: how does a venture founder create a business with independent value? Most owner-managed firms don't wean themselves off their dependency on their founders. The consequence is that the option of selling - certainly for the kind of price the owner(s) may want for the business - is never really on the table. I was staggered to read the other day that only 7% of attempts to sell private UK businesses are successful. The other 93% just soldier on and eventually either cease to trade or change ownership for a nominal amount.

There are many reasons why business sales fall through. But experience and intuition suggest to me that the major factor why most attempted sales never get off the starting-block is that there is nothing of any real value to a prospective buyer.

A large part of that value arises out of creating a business that runs independently of the founder. To achieve this, the founder has to learn to let go, and to spend increasing amounts of time improving the existing business and fashioning a new business for tomorrow. For many entrepreneurs a significant milestone in that journey is reached when they cease to be the CEO or MD and step up to the role of Chairman of their own business.

How do you know it's time to let go?

To return to our round-table discussion, one of the first questions to surface was knowing when the time was ripe to hand over the operational reins to a successor. One participant, chairman of a £ multi-million financial services group, spoke of a dawning awareness that the business which he had laboured night and day to set up was re-cast in his mind as an asset: to be sure, a very important asset, but in a sense no different from his stock portfolio or pension fund. Once he had crossed that bridge mentally, it was a no-brainer. Promote and recruit the best managerial talent he could find - invariably better at specific tasks than he was - and then create the conditions in which they could thrive. In other words, maximise the performance of the asset, not pander to his own whims and ego.

Others shared his view. And, as more self-revelation was put on the table, the word boredom cropped up. Being CEO of your own business is, after all, a job. Other people get bored if they're in a job too long. Boredom is almost certainly a sign that, on a day to day basis, the business can get along quite nicely without you. It's actually a positive signal, but it's potentially quite destructive. I've known too many entrepreneurs who suffer from a low boredom threshold. Without meaning to, they react to feeling bored by meddling and interfering for the sake of it, demoralising their staff and often causing many more problems than they solve. That's because they're confronting what ought to be another symptom that the business is ready for the change: the founder no longer understands [some of] the details of how the business works. For many entrepreneurs that's a reason to panic. Others embrace it. As another participant in the discussion put it: "I knew we were ready for me to change roles when someone produced a brilliant set of measurement indicators at a meeting. I hadn't asked for them, they'd just gone ahead and done it. Much better than anything I'd come up with. I asked when we were going to implement them. I was told we'd been using them for three months. Time for me to get kicked upstairs!"

Appointing your successor

The dream scenario is to have an obvious internal candidate for the MD's job, a seamless handover, and everyone lives happily ever after. For most people, however, that scenario is just a dream. Our executive recruiter gave some robust and practical advice. First and foremost it's a job, he pointed out. What's more it's an important job and a big investment: when you factor in all the costs involved in the search and selection process, salary and benefits for at least two years, it could be north of £250,000 even for quite a modest business. If you were spending that much on a piece of machinery, you'd invest some thought and care in the decision. He also pointed out that all the research showed most people were pretty poor at recruitment. It ought to be a scientific process, undertaken by experts in the field (note: since he has recently sold his business, he has no vested interest in pushing this line!).

There was general agreement that, even if an ideal internal candidate existed, he or she should be measured against a full job spec., drawn up independently. That spec. may well look like the opposite of the founder. If he or she is a typical entrepreneur, with a flair for invention, solving-problems and - in the nicest sense - self-promotion, the chances are you need someone with a head for detail, systems and processes who enjoys the steady-state challenges of managing operations. And if you are recruiting someone from a corporate background, with a view to their bringing with them the disciplines of a professional manager, make sure they fully understand what it's like to work in a smaller, entrepreneurial business. For at least half the people round the table that was the crunch issue, based on personal experience of recruiting corporate types who couldn't hack an environment lacking in big company infrastructure.

Managing the transition

It's good for a business to be shaken up from time to time was the general view. By all means prepare the ground, but don't pussyfoot around. Everyone needs to get the message that there's a new sheriff in town. One of our participants moved out of his office and just keeps a desk in the corner, to lower his profile in the business. He comes into the company from time to time, but deliberately holds meetings with his CEO off-site, to avoid any hint of undermining his successor. Harking back to the theme of regarding the business as an asset, everyone recommended that the new Chairman have plenty of outside interests and, if these were lacking, develop them fast. One contributor who couldn't make it on the day wrote saying that for the six months following the appointment he busied himself with other things. Be prepared to bite your lip, he advised. The new CEO will deliver what you consider to be 50% of what you did, which your successor rates at 150%. You'll be told that the systems you installed are woefully inadequate and some of your longest-serving, loyal staff are not up to their jobs. Your might not like what you hear, but the new man or woman must have the opportunity to build their own team around them.

On the other hand, be absolutely clear about your vision for the business and the paramount task of the CEO, which is to deliver it. As Chairman I have really only one job, said my correspondent: to fire the CEO if he fails to deliver!

So what should the Chairman actually do?

Well, there was plenty of discussion around this one. The fact is, no two Chairman's jobs look exactly the same. An important distinction that emerged is the difference between businesses with and without external shareholders. If the business has institutional or private investors, then there's a good chance that the primary role of the Chairman will be to manage the board and shareholders. Another contributor who couldn't make it on the day has a business with over twenty outside investors. He has been part-time chairman of the business for about a year now, and nearly all of that time is taken up in board business and conversations with shareholders - mostly on the subject of when and how the business will be sold.

The same contributor made another point. Entrepreneurs shouldn't confuse being bored with the role of CEO, with being bored with the business. Those who do risk selling their businesses prematurely and regretting it. Since he changed roles to become Chairman his enthusiasm for the business had been reinvigorated. He also sees it with fresh eyes and can offer his successor a more detached perspective.

For those who don't spend most of their time as Chairman managing their board and shareholders, there's a variety of opinion as to what the job should consist of. Strategy, finance, recruitment and new business development were all mentioned. The reality, however, seems to be that it's horses for courses, a mix of the skills and talents of the entrepreneur and the needs of the business. On three points there was general consensus:

First, becoming Chairman creates the time and space to think strategically about the business, so it makes good sense to take that opportunity. This does not mean the Chairman should have exclusive ownership of formulating and reviewing strategy. Indeed, the bigger the business, the more the need to involve others in the process. But it would be an exceptional situation for an owner-manager to relinquish a leading role in creating the strategy for the business they have built over the years.

Second, like it or not, the entrepreneur will continue to be viewed as the figurehead and ambassador for the business by staff, customers, suppliers and other key stakeholders. That's just a fact of business life.

Third, this is the ideal time to review the composition of the board, indeed the whole business of corporate governance. If you have external shareholders and non-execs already you will do this as a matter of course. If not, you will need to consider whether you have the right skills and experience on the board to support the new CEO in his or her role, and to take the business forward to the next stage. One contributor told how he had conducted a careful search to recruit a non exec. who would function as mentor to the new MD, and who could also as an intermediary between two people he described as chalk and cheese.

How do you know if you're doing a good job (as Chairman)?

If you have outside shareholders and a robust board to report to, they'll soon let you know! But most people in this situation are likely to be majority shareholders and the dominant figures in the business. So how should you assess your own accountability? Avoid the temptation to invent new or unneccessary performance indicators was the general view. The external reporting measures are the ones that count. Is the business delivering its targets? Is it on track to achieve the shared vision of the Chairman, the board and the CEO? If it is, then you're doing a good job! If not, it's time to sit down and take stock. The hardest thing for many owner-managers to take on board is often an acceptance that they will contribute more by doing less!

Some Dos and Dont's

Do

Consider whether this is right for you, the staff and the business. If the answer is yes to all three, you've passed the test

Develop outside interests if you don't already have them

Prepare the business, but don't fudge the decision once you've made it

Give your successor time and space to breathe

Be ready to take on responsibility for development of the board

Remember that becoming chairman may mean giving up things you enjoy doing

Don't

Get in the way of the new regime

Take inevitable changes personally: it really is just business.

And finally.. remember that in times of crisis, the role of the Chairman will come into its own.


© David Molian 2008