Losing your icon

WOE IS Apple. Steve Jobs has finally given up the chief executive’s role and the company will never be the same again.

To read many of the commentaries in the press, however, you would think the company that brought us some of the most successful consumer products of all time stands on the edge of disaster after the iconic Jobs stood down from running the business. Can Apple still produce game-changing products like the iPod, the iPhone and the iPad? Will it remain a centre of innovation and creativity? Will core values aimed at producing the highest-quality products remain unscathed?

Many drew parallels with the departures of other iconic CEOs ­– Henry Ford, Thomas Edison and Walt Disney – and suggested darkly that those companies were never the same again once their leaders had gone.

But while most observers focused on the future of Apple as one of the world’s leading consumer tech companies, there is a far bigger question: just what do you do about iconic CEOs so closely associated with their companies that it is hard to see a future for the business without them? How do you ensure survival for a company so dependent on the charisma and vision of a single inspiring, or driven, individual?

Jobs presents a case in point. In 1976 he was among the four founders of Apple. Seven years later he was instrumental in hiring PepsiCo chief John Scully as CEO. The company prospered but the relationship soured. By 1984 a sales slump prompted an internal power struggle that saw Scully oust Jobs from the company. Jobs went away and founded NeXT Computer. But 12 years later Apple bought this new upstart tech business, bringing Jobs back to his roots and the CEO’s job. Phenomenal success with a host of new products followed.

This story is instructive in one way. It is not really about an “iconic” CEO, it is about a “founder” CEO, and in Jobs’ case, according to many commentators, one who arguably founded the same company twice.

It is the founder CEO issue that is at the heart of the problem and quite distinct from the issue of what to do about replacing a highly successful manager.
Founder CEOs are there from the beginning; they have huge emotional and financial capital in the company and often a loyal following among those who see them as the core value driver for the business. They attain an almost mythical status. Who could imagine Dell without Michael Dell, Oracle without Larry Ellison, Berkshire Hathaway without Warren Buffett? These are exceptional people.

But the position occupied by such people in huge multinationals is even more common among growing companies and SMEs where founders rule the roost and other stakeholders come to see their continued leadership, or departure from it, as a major issue for their companies and, moreover, their investments.

The good news is that the level-headed analysts who have resisted genuflecting at the almost cult status of Apple’s former chief, reckon the company has more than a fighting chance of prospering without Jobs.

Adrian Slywotzky, partner at Oliver Wyman, describes in a recent Harvard Business School blog how the success of Apple is not down to Jobs’ inspiration, it comes down to the detailed processes the company has in place.

Dispelling the myth

“The glitter you see is not the explanation; look carefully and the inspiration/ perspiration ratio is where it should be,” says Slywotzky. “Under Jobs’ leadership, Apple has done 10 times the amount of relevant homework of most companies – internal competitions, supply chain training, endless deal-making, recruiting, training and generating and sustaining employee excitement that you just can’t fake.”

That goes some way to dispelling the myth of the inspired founder/leader.
Rob Goffee, professor at the London Business School, put it another way when in a recent commentary he cited the example of Hewlett Packard as a company that successfully institutionalised values that came direct from its founders (interestingly there is an account of Bill Packard declaring to a gathering of business leaders in 1949 that there was more to business than raising money for stockholders. “We have a responsibility to our employees to recognise their dignity as human beings,” he said to a shocked room). Combine the values with robust strategies and processes and you start to build an enterprise that begins to exist well outside the need for the founder CEO.

Daniel Ferreira, professor at the London School of Economics, has studied founder  CEOs specifically. He says that they generally go out at a moment of success if they come from mature companies where they have been in charge for some time.

“Founder CEOs are very powerful, more powerful than regular CEOs,” he says. “Therefore, if you leave on a high it is more likely you can appoint your heir or successor.”

He adds: “The best thing they can do is time their succession properly – staying as long as possible to ensure the right person is running the company.”

Jobs and Apple are a perfect example of this approach. Despite his ailing health, Jobs remained in charge until he was sure successor Tim Cook was ready. Like many founders, Jobs moved up to the chairman’s role. That means he can still do the showboating while Cook gets on with strategy and operations.

Why is this possible for a company like Apple? Why does it not worry about the loss of the “inspiration”. For many the reason is simple. Jobs has long since ceased to be the fount of all knowledge and taken on the mantle of professional manager. Forbes writer Jason Raznick passionately argues his weariness with the cult of Steve Jobs and the zealots who argue he is a visionary. He points out that products such as the iPod were at first developed outside the company. Tony Fadell, who had worked for Apple, developed his hard drive music player while running his own business. He went to Apple looking for further funding. On Jobs, Raznick concludes emphatically: “The man could run and market his company, and that is about it. He did not have crazy visions and insights into entertainment; he was a computer nerd who could manage people. Nothing more and nothing less.”

Apis mellifera

Exploring the role of Steve Jobs at Apple only takes us so far when looking at founder CEOs. The majority will be running smaller companies and most of those will be new or growing businesses.

At this level the stresses are very different because founders are often technicians or experts of some kind who discover an appetite for being an entrepreneur.
Remember the famous quote from economist JK Galbraith: “The great entrepreneur must, in fact, be compared in life with the male ‘apis mellifera’. He accomplishes his act of conception at the price of his own extinction.”

And so it seems, according to research, that is the case. Back in 2003 Noam Wasserstein of the Harvard Business School looked at the issue of founder CEOs and their survival rates in depth.

What emerged was something he dubbed the “paradox of entrepreneurial success”. In short, when entrepreneurs reach key landmarks in the development of their companies, they are more likely to be shown the door.

But how could that happen? How could the people with the vision be so rudely ejected from companies they helped to build? The answer comes broadly in two parts: finishing the development of a key product, or seeking fresh funding. Both events have the potential to bring a founder CEO’s tenure to a precipitous end.
Wasserstein reveals that concluding work on a new key product could prove a career threshold.

“This is because the company’s needs shift dramatically,” he says. That is, the demands on the CEO change radically from focusing on the product to marketing, sales and managing the finances. It is a brand-new skillset and one potentially absent in the founder CEO. As Wasserstein puts it, the shift is from “technical contingencies to marketing and sales ones”.

Then comes the next threat: funding. Wasserstein concludes that in many cases “the need to raise a new round of financing helped force a change in CEOs”. He says that in one interview for his research a venture capitalist told him: “Our default assumption when we first look at a company is that the founder CEO can’t lead this company going forward.” Outside investors prefer professional management and they make it a condition of their involvement.

So how do founders survive? Two ways: by developing managerial skills and avoiding the funding issues.

Finding new skills is not impossible but it is time consuming and risky if funding has become a pressing issue.

Avoiding the funding showdown can be achieved in two ways, according to Wasserstein. Stick with existing funders and raise fresh capital from them. Next, raise small sums of capital. Wasserstein hints that the larger the funding round, the more likely a change in CEO will emerge as an issue. Small sums represent lower risk and therefore less attention on the role of the CEO.

All of this puts the FD serving a founder CEO in a fascinating position. The founder wants power, and a return on their investment. They will feel as if they “own” the business, financially as well as emotionally. Sent out to find funding, the FD could well run up against the condition that the CEO must change. Honesty and transparency in this case will be key.

The FD will no doubt have to make a call on what is the risk presented by a founder staying in place.

That is not to say that founders do not survive. But it may well be that their skillset makes them a better option for chairman rather than CEO.

Roger Barker of the Institute of Directors sees another clear route for company survival in the face of an all-powerful founder: corporate governance. Build the right governance framework and that will outlast the CEO however great his charisma and vision.

Iconic CEOs extra

However, there are those who do not see founder CEOs as liabilities. Some commentators cite the efforts of Fortune magazine staff to pick a CEO of the decade in 2009. In the end they picked Jobs, but all of the other 12 candidates shortlisted on the table were also founder CEOs.

The debate over founder CEOs is intense in the US, especially over corporate leader-ship in the competitive tech world. Sides have become polarised as observers have watched venture capitalists (VCs) force the appointment of new CEOs while founders elsewhere have gone on to great things.

One VC has become notorious for taking a contrarian view. He positively promotes founder CEOs as the best bet. In what became a notorious blog post last year, Ben Horowitz, one of the founders of VC firm Andreessen Horowitz, said: “Professional CEOs are effective at maximising, but not finding, product cycles. Conversely, founding CEOs are excellent at finding, but not maximising, product cycles.” It is an opinion that appears at first to comply with the view that, once past the key product development milestones, it is worth politely suggesting the founder moves on. But Horowitz takes his argument further: do not oust the founders – train them.

“Our experience shows – and the data supports – that teaching a founding CEO how to maximise the product cycle is easier than teaching a professional CEO how to find the new product cycle,” he says.

Horowitz believes founder CEOs take a long-term view of their projects and stick around to see them through. But more than anything Horowitz (and here it is likely he is thinking mostly of tech chief executives) believes that founder CEOs have the vision to make the emotional and strategic break with old products to push all their energies into new ones.

It is an intriguing view and verging on counter intuitive. The natural assumption would be that founders stick with the products they develop. But Horowitz says they have the advantage.

“Often, true innovation requires throwing out many of the foundational assumptions of the company,” he says. “Doing so may be extremely difficult for the professional CEO. The company’s core belief system is often entangled in those assumptions. Since the founding CEO made the assumptions in the first place, it is much easier for her.”

Professional CEOs, goes the argument, are trapped by short-term results cycles, matched by short-term incentive schemes. Blinded by these, the professional outsider finds it almost impossible to separate him or herself from what appears to be making the money.

Putting aside the shock of hearing that a VC believes in long-term development, Horowitz’s views can lead to a couple of conclusions. On-the-job training for the founder CEO is crucial, and that is likely to be achieved by building a strong team around them supported by robust systems, processes. That potentially makes the addition of a quality FD to the founder’s team critical along with some reasonable governance structures. The FD will need to be aware that the role he or she is performing is not just about helping to maintain robust finances and aiding the development of strategy. They will be instrumental in helping the founder CEO learn those skills too.

Horowitz’s article sadly provides little detail on how to transform a founder CEO into something else. He does note that a founder requires the necessary desire and disposition to lead. But he also admits that learning to be a professional CEO on the job brings “frustration and exhaustion”.

Founder CEOs have confessed publicly that a strong FD and board are crucial. Further difficulties can be remedied with a powerful chief operations office. As Bomgar Corporation CEO Joel Bomgar wrote for CNN: “A company is a living, breathing organism, and the founder is a key part of its lifeblood.”