Founder succession: the good, the bad and the ugly

Photo courtesy of Anna Fayet on Flickr

Photo courtesy of Anna Fayet on Flickr

Rob Swystun, Pristine Advisers

It’s one thing to fire a CEO or depose a board chairperson who doesn’t have a lot of history with a company, but what about sacking the founder? I mean, they started the whole thing. The people trying to sack them wouldn’t even have their jobs if it wasn’t for the vision of the company’s founder.

But sometimes they need to go and in the worst case scenarios, they need to be shown the door rather unceremoniously (that’s gotta make for some awkward board meetings).

Reuters’ Nadia Damouni took a look at some of the good, the bad and the ugly when it comes to ousting a company’s founder and this is what she found.

American Apparel Inc.; Lululemon Athletica Inc.; Men’s Wearhouse Inc. and Best Buy Co Inc. have all recently decided that it was time their founders stepped down from their role as either CEO or chairperson and all of those founders have decided to fight their ouster via their substantial equity stakes in the companies.

The reason founders are being given the heave ho — a trend that is likely to continue according to business experts — is because shareholders are demanding more of boards nowadays than in the past. They’re holding boards accountable for succession planning, maintaining return on investments and general fiduciary duties. The shareholders poke the board members, which means board members are, in turn, flexing their muscles more frequently.

“Today’s boards are increasingly feeling pressure to anticipate the CEO leadership needed to drive future success. This is especially true when the CEO is the founder of the company,” Jane Stevenson, head of the global CEO succession practice at Korn Ferry International, said. “In these situations the board can feel significant conflict between appropriate homage to the past and the leadership needed to drive success in the future.”

Data compiled by recruitment firm Heidrick & Struggles for Reuters indicates that as many as 42 Fortune 500 companies have founders in CEO positions. And they tend to stick around, as founder-CEOs have an average tenure of 22.5 years, compared with around six years for non-founding CEOs.

“Founders are often the ones that have the ‘special sauce’ that makes a company’s offering and culture work, so they might be given additional latitude … as their vision drove value creation in the first place,” Heidrick & Struggles‘ Vice Chairman John Wood said.

The Good

Let’s start with the good. Many founder departures are smooth and the founders do their best to ensure their successors are able to run the company as they want, while still making themselves available so boards can tap into their knowledge of the company and the customer base.

David Calhoun, former CEO for Nielsen Holdings N.V., said he would get advice from Arthur Nielsen Jr., whose father founded the company in 1923 and who is credited with making the company’s name synonymous with television ratings.

“Art Jr’s advice went to the heart of our business: the potential conflict between serving client’s needs (the companies we measure) and our commitment to objective measurement,” said Calhoun, now executive chairman at Nielsen.

When Alan Mulally took over as CEO of Ford Motor Co. from Bill Ford in 2006, he received full support from Ford, executive coach Marshall Goldsmith said.

Goldsmith, who has worked with Mulally, said that early in his tenure, top executives challenged Mulally’s initiative to conduct a weekly review of business priorities. But, Mulally had the backing of Ford, who helped him implement the plan, which turned out to be vital to the automaker’s successful turnaround.

Goldsmith’s advice to founders is to pick a date to hand over the company and start working on a succession plan.

“Leave with dignity; don’t get thrown out,” Goldsmith said.

But, it doesn’t always work out that way …

The Bad

Lululemon was once the darling of the retail stock realm, but the massive recall it had to enact last year — due to some of its yoga pants being see-through — made its stock plummet.

Founder Chip Wilson did the gracious thing by stepping down as non-executive chairman so CEO Laurent Potdevin could run the company. He even remained on the board so he could share his wisdom about the company and its customer base. But then, according to an anonymous source close to the situation, Wilson did the rather ungracious thing by wanting to be involved a little too much in management decisions (after the board had guaranteed Potdevin that he would be free to run the company as he saw fit). According to Damouni’s anonymous source, Wilson is increasingly frustrated that he’s not being given enough clout in his own company now. He owns a 27% stake in Lululemon.

Things came to a proverbial head in June when Wilson publicly criticized the board’s new chairperson and another director, saying they were too focused on short-term growth. Things have recently simmered down, though, as Wilson has agreed not to start a proxy war with the company and has also agreed to sell half his stake to the private equity firm Advent International.

Shares of Lululemon have fallen more than 40% since Potdevin’s appointment in December, a reminder that public disputes with founders can be costly to companies’ share value. Representatives from Wilson and Lululemon declined to comment on Damouni’s story. No surprise there.

Similar battles between boards and founders at Men’s Wearhouse, Best Buy, and Groupon Inc. have also had a negative effect on stock prices while those battles were raging.

“Numerous times I’ve seen first-hand how the founder dynamic can be particularly challenging for fellow board members to successfully grapple with. Internal disputes that become public are one of the most dysfunctional events companies face,” Brad Allen, himself a founder of Branav Shareholder Advisory Services, said. Branav counsels boards and shareholders on governance issues.

It does get worse than that, though …

The Ugly

American Apparel founder Dov Charney (pictured above) used racy ads and sweatshop free “Made in the USA” values to sell his company to people, but things have not been going well lately for him or the company.

American Apparel has posted losses in nearly every quarter over the last four years. This likely played a part in the board firing Charney in June, but then he also allegedly misused corporate funds and also allegedly had a hand in spreading nude photos of a former employee around the Internet (this would be the ugly part).

Charney’s denied the allegations and is fighting for control of the company by increasing his stake to 44%, from 27%. Although, he has also signed over his voting rights and shares to the hedge fund Standard General as collateral for a loan.

Charney apparently wants to maintain a say in things like the makeup of the board or M&A deals, whether or not he returns as CEO.

Damouni says American Apparel is waiting for the results of an internal investigation before deciding what to do about its founder and, unsurprisingly, a spokesman for the company declined to comment on her story.

It’s easy to see why a founder would have such a hard time letting go of their own company. Despite the fact that it may now be public and therefore it doesn’t technically belong to them anymore, there still must be a sense that it is theirs because they created the thing and were responsible for making it a success in the first place. But, every endeavour, if it is to survive, needs new blood, new ideas and new people willing to challenge what has long been accepted. It’s just progress. Founders can do it the easy way or the hard way, but they all eventually have to relinquish control at some point.


One response to “Founder succession: the good, the bad and the ugly

  1. Pingback: Prepping investors for a change at the top need not be a difficult task |·

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