When the time comes to fire the founder

First published in the Financial times on the 22nd July 2014.

As a company grows, it’s very success often exposes the founder’s lack of managerial skills

Last week I had lunch with the founder of PizzaExpress, Peter Boizot, at his grand old club, the National Liberal. He is 84 and has just written an autobiography: Mr Pizza and All That Jazz. Peter is a typical founder – maverick, obsessive, extrovert, energetic, egotistical and relentless. In many respects he has led an impressive and exemplary life – inventing businesses, creating jobs, providing entertainment and donating almost his entire fortune to good causes. As he puts it in the final chapter of his memoir: “I will always be proud that at every stage of my life I have invested everything into the things I love – whether it was pizza, jazz, heritage, sport or the arts. I think my work has benefited all of my passions, which is a fine footprint to leave behind.” He stepped aside with grace from his restaurant company after almost 30 years in 1993 when we took over, and remains its life president.

Many other founders do not depart smoothly. Dov Charney, the ex-boss of clothing firm American Apparel, is the latest example of a high-profile founder to be fired. For years his directors indulged Mr Charney’s eccentric conduct; but recently it seems that “alleged misconduct” provided a handy pretext for a boardroom coup. It is a surprise that Mr Charney was surprised; yet many founders are so narcissistic that they fail to accept their weaknesses, or take threats seriously.

The guru on this subject is Noam Wasserman, who wrote an insightful book called The Founder’s Dilemmas. The author quotes research indicating that almost three-quarters of founder-CEOs are sacked rather than step down voluntarily. The major reason for these dismissals is that most founders do not make the best long-term chief executives; but they find the handover of control an agonising loss. As a company grows, its very success often exposes the founder’s lack of managerial skills – thus hastening the day a successor is required.

There are plenty of explanations as to why founders are so reluctant to surrender the reins of power. Many are frightened of retirement, and have no real hobbies or personal life to pursue once their working career has ended. Lots of founders are so focused on their company that their social life and status revolve around it. At its most basic, they need somewhere to go every day. Others worry that their creation will be changed if they depart – which in their mind means ruined. Often founders feel they need the income and expense account their business provides.

Other founders are smart enough to fire themselves. Nick Jenkins of Moonpig, the online greetings card business, relinquished the role of managing director to his former head of operations after eight years. And Sir James Dyson, inventor of the bagless vacuum cleaner, appointed Martin McCourt to run his company in 2001, and instead became “chief engineer”. Both understood their strengths, and perhaps realised that initiating ventures, not running them, was what they most enjoyed.

Mr Wasserman postulates that “successful CEO-cum-founders are a very rare breed”. His theory is that founders should make a trade-off: either aim to be a king or rich – they are unlikely to achieve both goals. This is partly because founders tend to have a strong emotional attachment to their creation. This infatuation can lead to a loss of perspective, and distort the founder’s motivations. Dispassionate outside investors, such as venture capitalists or public company shareholders, do not fund a company to change the world: they back it to make a financial return. These divergent objectives can lead to conflicts, and the ousting of the begetter of the entire undertaking.

Yet some clever investors prefer founding CEOs. For example, at VC firm Andreessen Horowitz, they studied great technology companies and noted that founders ran an overwhelming majority for a long time, including Jeff Bezos at Amazon, Ken Olsen at Digital Equipment Corporation, David Packard at Hewlett-Packard, Bill Gates at Microsoft, and Akio Morita at Sony. They believe that founders are better at innovating – while also possessing moral authority, deep knowledge and a long-term commitment. I sympathise with their philosophy, and agree that the best founders are usually also the best CEOs of their business – because by nature they are resourceful all-rounders.