3.8 CEO Succession

It is rarely the case that the person who founds a technology company remains as CEO from inception through rapid growth and maturity. Different skills and experience are needed at various stages of growth, as has been well documented in management literature.

Therefore, there will come a time, or several times, when the Board must replace the CEO. As recently as a few years ago, this process was often handled quite poorly. Often it would take the following sequence of events:

  1. The CEO would reach his limits and begin to flounder;
  1. The company’s performance would begin to deteriorate;
  1. Company morale would begin to suffer;
  1. Company would run out of cash;
  1. Venture capital investors would refuse to invest unless there was a change in CEO;
  1. The CEO was forced to resign;
  1. Company morale would now plummet in the face of the stress;
  1. VCs would refinance, typically at a much lower price – founders, employees, and angels would be diluted;
  1. Company morale would be at rock-bottom;
  1. New CEO would valiantly try to re-energize the company, while repairing the many relationships that had been damaged, and dealing with the fall out of the CEO’s departure.

Venture capitalists will admit openly that this process usually did not work. Often the damage to company credibility with its customers and employee morale could not be overcome.

Implicit in the spiraling sequence depicted above is the fact that the Board is a passive observer or mildly acquiescent to the process. If, however, the Board had been effective, the process would be much better, and the outcome likely better.

First, the Board needs to be pro-active in reviewing the skill sets needed in the CEO at the current and next stage of growth of the company, i.e. it needs to develop a succession plan. The current and future strengths and weaknesses in the incumbent CEO should be identified early. This gives the Board the information and time it needs to provide additional training for the CEO, hire senior management to plug the holes, or recruit Directors who can advise the CEO in the areas where he needs help. This process might prolong the CEO’s tenure and obviate a degradation in the performance of the company caused by the missing skill sets. This is an example of the Board being effective.

Nonetheless, the Board may decide that the CEO does not have the skills and cannot acquire them, and therefore needs to be replaced. Again, this is not a decision that is made under stress, but is planned well in advance to avoid a crisis. The CEO must be fully involved in this assessment, which may occur as part of an annual performance review

Ideally, the very best way to recruit a new CEO and to manage the transition to new leadership, is for the CEO to manage the process himself. This demonstrates to the company his commitment to the change and should mitigate an adverse reaction from staff. Often there is a role for the departing incumbent as the Chief Technical Officer or other functional role, or a position on the Board.

But there is a subtle danger. If the incumbent is not ready to relinquish the reins but is not prepared to oppose the Board, he can pay lip service to the process but then not effectively execute it. As long as he is in charge of the recruitment process, it can take forever, and never find the ideal candidate. This leads to a longer-term malaise in the company as everyone views the CEO as a lame duck while the process drags on.

Should it not be pragmatic to have the incumbent manage the recruitment, the Board should strike an ad-hoc recruitment committee, which may be Compensation Committee. The Board should announce that a search is underway and indicate the future role of the incumbent. The more transparency in the process, the greater the support. The recruitment committee will be guided by the succession plan. Again, the Board is effectively managing the process and mitigating potential negative consequences. It is not left to the investors to react to a poorly planned transition.