How to transition from founder to CEO: four practical steps
At some point, every business needs to make a transition from relying on its founder to employing a CEO. It’s true that some businesses have made the transition from founder to CEO without switching captains: Think Jeff Bezos, Richard Branson, or Mark Zuckerberg. But this is the exception, rather than the rule.
In this article, we’ll set out why every business must confront the decision of moving from its original founder to a CEO, and four practical steps you need to take to manage that transition if you think that this crossroad might be coming up for your business.
“By the time that a company is considering the transition to CEO, many founders will be happy to pass on the baton. Others might get concerned about a potential loss of control and/or how this impacts on their ownership stake.
Egos will have to wait outside the door at this meeting. ”
What is a CEO?
Before examining the steps a business should take in appointing a CEO, we need to get straight on what precisely a CEO is. Put simply, once a company reaches a certain size and complexity, it automatically has a CEO. A CEO is not just a job title assigned to someone. After all, many large companies do not have anyone with a LinkedIn profile headed ‘Chief Executive Officer’. They might have ‘Managing Directors’, ‘Executive Directors’ or ‘Presidents’, instead. What matters is not what the job is called, but who fills a certain function or role within the business. Thinking about the role they play, we can see a CEO as having the following attributes.
- They are one member of the executive. As an executive officer, the existence of a CEO assumes there is a defined leadership or managerial team at the top of the organization, which they are one component of;
- They are a Chief. Not only are they a member of the executive they head the executive;
- They are appointed by stakeholders. In many cases, this will be a Board of Directors, but it could also be private investors or shareholders who determine who will fill the role.
‘Founder’, by contrast, is a looser term for anyone who establishes a business.
Why make the transition from founder to CEO?
Looking at the features of the role identified above we might say that it is time to appoint a CEO when:
- The organization has reached a size where one person cannot do it all, and responsibilities need to be clearly separated and delegated. There is no one point at which this happens in every company or number of years required to reach this point;
- There are separate company stakeholders (such as investors or shareholders) and employees. Special skills are needed to balance the needs of both parties while ensuring the business keeps customers as its ultimate focus. Often this is forced upon a business when significant investors require that a CEO be appointed;
- Compliance and legal obligations mean that there needs to be a clear separation of roles within an organization. In many jurisdictions, the CEO has specific legal responsibilities, so it is important that it is established clearly who takes on that responsibility
In light of these considerations, it is inevitable that a time will arrive where a CEO is required. There are some good reasons for any start-up not to simply follow a process where the founder becomes the CEO by default. If a business is to make the founder the CEO, it should be intentional, and after careful consideration.
Below we consider the steps that you need to take when it is time to appoint a CEO.
Step One: Initiate a conversation with the founder
By the time that a company is considering the transition to CEO, there are multiple stakeholders in the business. These stakeholders need to talk to the founder about the ongoing role they might have in the company. Many founders will be happy to pass on the baton. Others might get concerned about a potential loss of control and/or how this impacts on their ownership stake.
Having this conversation early avoids a messy transition and increases the likelihood that the founder will stay on to work with the company (see step four).
If you are the founder yourself, this is a time when self-reflection and honesty are key. Making this transition after going through the struggle of building and growing a company can be an extremely challenging step. Communicating clearly with all the company’s stakeholders and working to clarify what skills are needed to move the company forward are key. It may well be that you are the perfect person for the job, but your self-awareness will be tested in these times. Egos will have to wait outside the door at this meeting.
Step Two: Set out the strategic vision for the company
The founder operates with an intuitive grasp of the strategy of the company: the business was founded on their vision, after all, and this will be integrated throughout its operations. In the process of appointing a CEO, however, this strategic vision needs to be explicitly set out in a Strategic Plan. There are two key reasons for this: Utilizing the founder while they are still intimately involved in the business’s operations and ensuring that the views of wider stakeholders are taken into account before taking the next steps in the business’s evolution.
Step Three: Map out the key functions within the business
The term is not ‘Sole Executive Officer’ — the CEO heads a leadership team. In transitioning to a CEO role, it is important to set out the other leadership roles that will sit alongside the CEO. This moment marks the creation of a new team that has been selected to move the company to the next level. The exact roles will depend on the organization in question, as different functions are more or less relevant depending on the market: The Corporate Finance Institute sets out some useful distinctions you could make. Other functions to consider include, depending on the nature of the business: Chief Operating Officer (COO); Chief Financial Officer (CFO); Chief Technology Officer (CTO); Chief Marketing Officer (CMO); and Chief Legal Officer (CLO).
The expectations for each role (their ‘job description’) in the leadership team, and how they are going to report to and work with the CEO and within the company’s broader strategy, need to be established.
Step Four: Establish the ongoing role for the founder
In nearly all cases, even if they do not take on the role of CEO, the founder’s vision and experience will be useful for the ongoing success of the company. Jari Tuomala, Donald Yeh & Katie Smith Milway have made a strong case for why this is important in the case of a non-profit and it’s reasonable to think this case extends to commercial business.
As well as their experience and deep knowledge of the business and its market gained in the early years with the business, in many cases, the name recognition associated with the founder is an important part of business goodwill (consider, for example, Bill Gates and Microsoft or Steve Jobs and Apple). The business needs to consider how the founder can continue to share their expertise with the business, and how an ongoing relationship between the founder, the company leadership, and Board is going to work: One possibility is to develop a specific salaried role for the founder.
Conclusion
Every business should celebrate reaching the point where a CEO needs to be appointed. This means the business has scaled impressively. However, when that point is reached, it is important to make the process intentional: Think about the conversation between the founder and stakeholders, strategy, separation of the business functions, and the need for an ongoing role for the founder.
