Tips for Owner Manager CEO Succession

Whether it’s for an exit or simply because you the Founder want to return to what you enjoy – When it comes a time to bring in a CEO or COO into the business, there are many ways to fail. Many Founders out there have stories of failure and frustration, sometimes with multiple failed attempts.

Owner Manager businesses operate in a unique manner.  The tenacity and behaviour of the Founder which created success is generally not going to scale well. Most of these businesses have a major key person risk issue, with an over dependence on the Founder.

Generally strong Founders create teams of followers under them, rather than leaders. Decisions and processes are easy, “just do it my way”. It is not uncommon for high growth companies to have 30+ staff working under a Founder with no other leadership talent in the business. This means that there is no natural successor already in the business. As a result of this the new CEO will often need to bring in new leadership talent to build up the management team capability to enable the company to grow.

Are you ready to bring in a COO or CEO for your business? 

Look for your first CEO

Some common triggers for owner managers to hire there first CEO or COO:

  1. Founder can add more value to the business in technical role – and you (the Founder) hate the boring operational stuff
  2. Founder’s time availability is restricting growth – you are living on less the 5 hrs sleep a night
  3. Founder stressed and not having fun – your staff hide when you are in that grumpy mood
  4. Founder is looking to exit / sell – and investors/purchasers will quickly realise business will not work without you
  5. Founder doesn’t have the skills or passion for managing the business
  6. Business cannot operate without the Founder there – when was the last holiday you had and enjoyed?
  7. Business will be more successful without the Founder at the helm

Tips to successful succession:

  1. Try before you buy – bring your potential successor into the business on contract, as a GM or COO role, limiting the initial mandate. Getting the prospective CEO to come in and develop a business plan is often a way they can infiltrate the business and both parties can perform due diligence on each other. Founders often just live and breathe their vision and get frustrated when people go off track, yet it is not clearly communicated or understood. So take the time to share the business’s WHY (see Simon Sinek Why? blog) and vision on paper.
  2. Travel together – International travel and meetings with customers is a great way to learn a lot about people in a short time and from the appointee’s perspective they can learn a lot about the business and its products.
  3. Recognise CEO’s are different from Founders. You are not recruiting another you. Founders are supermen, whereas growth phase businesses will need effective leadership teams. The CEO’s first significant task will often be establishing and building an effective senior leadership team or get the current one functioning as a team. As such growth businesses need to strong leaders rather than visionaries and technical experts. They need to be highly skilled in getting work done through others, whilst having empathy and understanding of the core value generating technology.
  4. Prenuptial – organised exit – Given the high-risk factor in the appointment of a new CEO, build a tidy exit plan in for both of you. Include the basic out clause “due to substantial incompatibility and/or irreconcilable differences”. If equity deals are involved in the compensation plan ensure shares are not issued until post a decent period eg one year.
  5. Acknowledge the ongoing influence of the owner: In many cases the Founder owner will stay either in the business perhaps as CTO or at least have a strong influence. This is no corporate CEO reporting structure. Founder personalities, opinions and yes ego will be a large factor in the ongoing success of the business. The CEO/COO capable of managing through the arduous transition in the change of guard needs to be aware this will not be a traditional Chairman to CEO relationship – despite what the paper work says.
  6. Clear mandate and communication model: Communication between Founders and CEOs often fall into two fatal camps of over or under communication. I have witnessed cases of abdication of control vs delegation of control i.e the owner completely walked away from the management of the company only to find the business near in ruin before they acted.
  7. Monitoring mode & KPIs – spend the time to agree what success looks like and how you will regularly report against it. Equally so what it doesn’t look like. A pre-mortem is a worthwhile activity (see other blog post). I would always recommend having an effective board with a third party Chairman or at least other board members to help with circular reporting structures (Owner as chairman – CEO reports to Chairman – owner as CTO who reports to CEO)
  8. Staying in business is OK. Unlike traditional corporate structures, its common place for the Founder to stay on. Be clear about your new role and have established & regular communications with the new CEO.
  9. Incentives earnt not given – I am a great fan of incentivising senior executives, but I would warn any owner of issuing equity on day one. I recommend a stand down period of at least 6 months, ideally one year to bridge the honeymoon period. When it comes time to issue equity it should be purchased or at least sacrificed for bonus payments. In the first-year profit share or some other form of bonus may be more appropriate.

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Mark Robotham (Growth Management Consulting Ltd) – works with owner managers bridging the succession gap. For more information on this topic contain him direct via his web site growthmanagement.co.nz

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Simon’s tips on boards

Some great blog posts by Simon Telfer (co-founder of  Springboard NZ)  – on boards that are worthy of a read.

Words for the wise – some great quotes from experienced board members … I like this one best

“Good news is written succinctly. Bad news is wordsmithed.”      read the rest here>

Finance on Full Beam –  “It’s like you’re speeding down a country road at midnight with only your park lights on”, Simon commented to a client.  Scary thought.

The problem was their internal accounting team, who were ill-equipped for the requirements of a rapidly growing, idea rich and cashflow poor organisation.

This is not unusual. Some of the quickest and most enduring gains he has implemented with his clients, has simply involved upgrading their internal finance function… read the rest here >

When should you not set up a Board?  and extract from Who’s on Board?

Here you have to be true to yourself. If in all honesty you have no desire to let go and have others involved in guiding your business then there’s no point. Similarly if you as the owner are happy with the status quo and have little appetite to grow your business or to seek a change of control then the time, effort and cost involved in establishing a Board may be questionable. Engaging someone to monitor risk and compliance issues would still be prudent but this could be achieved through your professional advisors rather than via a formal Director… read the rest here>

Finding Your First Advisory Board Member

Selecting your first board member can be a challenge, so how do you go about it?

I always recommend business owners establish and work with and advisory board setup first, before committing to formal directorships. This can often be a good win-win situation for both business owner and board  member.

Work out what are your immediate needs?  Do not confuse specialist professional advice from what you want and will get from an advisory board member. They have two separate functions and purposes.

I personally believe that you need a generalist for your first non-executive board appointment. Someone who is going to challenge and support you and is capable of working across all disciplines from Finance to HR to Sales and Marketing.  See my earlier blog posts on this subject

Chosen correctly an advisory board member will be able to help you select and get the best out of specialist professionals such as lawyers and accountants.

As a side note: in many cases I have found as an non-exec advisory board member the first task often is to help companies review their current professional service providers (legal and financial services). To often companies have gone for “cheap” “rear vision looking” providers, who are great at documenting what has gone on in the past and ultimately deliver poor value.

All of your service providers need to add value well beyond their fee. As an example, accountants who do annual compliance accounts for $600 a year typically add no value other than recording history and ticking a box for the IRD.

So where do find a board member?

 If you are on a super tight budget (most SME’s are) and are looking at establishing an advisory board I would recommend:

  1. Put the word out around your network. Ask around fellow business owners who you have respect for. They will have recommendations or if you are on a super tight budget – use a “quid pro quo” arrangement with them.
  2. Springboard NZ – is a great network of “young” emerging directors, that has a pool of great executive experience and full of people looking to build board portfolios.  You can post your request directly on their linked-in group. Linked-in Networks are a great place to find talented people and aid with reference checking.
  3. Ask your accountant lawyer to recommend: while in most cases I would not recommend using a lawyer or accountant as your first board member they will have connections and networks of great people.

For those of you with a recruitment budget formal placement services such IOD and specialist placement services – may help you out if you do not have access to an established network. The IOD first boards web site is also worth a visit

Warnings:

  • Make sure you create a wish list for the characteristics of your most wanted board member and be open to how you meet it.
  • Make sure you select people who “get” businesses of your size and culture. Experience on the board of Telecom could well be a hindrance to your $2M a year turn over company.
  • Personally I have a dislike for brand names, franchises etc – please reference check the actual person you are going to be dealing with.  See how they measure up and what real in business experience they have had.
  • Don’t sign locked in contracts – if they do not work you need to be able to quickly exit them.
  • Don’t pay by the hour – you need to feel comfortable the relationship is not being measured by the clock.

Other blog posts by Mark on Governance – Advisory Groups etc for SME’s

Desirable Personal Attributes Of Board Members

What characteristics do you look for in a potential board member?

To effectively address the needs of an emerging enterprise, the most effective board members will exhibit the following personal qualities:

  • Emotional stability – with EGO in control
  • Strong interpersonal communication skills
  • Pattern recognition skills – “ability to sense trouble ahead of time”
  • Ability to partner
  • Investment and hands on operating experience
  • A strong network of business contacts
  • Ability to mentor the CEO
  • Ability to view problems from multiple viewpoints include the “customer point of view”

This list came from a great paper I have just read from Levensohn Venture Partners (LVP)website entitled “After the Term Sheet : How venture boards influence technology companies” a link to the full paper is here, its worth a read.

Another great extract from this insightful document was a list of why boards fail.

10 Common Pitfalls of Boards

1. Complacency – Inability to confront difficult issues
2. In-Decisiveness
3. Distraction and over-commitment
4. Divisiveness on the Board
5. Paralysis over liability issues
6. Board Member role confusion
7. Leadership vacuum
8. Loss of trust –respect in the CEO or other board members
9. Resolution to fail
10. Misalignment of interests between Board Members and investors

 

They also have a great agenda item for your next board meeting : “what are the 3 top issues facing your business?”, often boards can fall into the trap of just ticking the boxes and following the standard agenda

LVP  have another great white paper on their web site  ”Rites of  passage: Managing CEO transition”. Both these papers come from the angle of a VC backed company but work for any emerging business and a worth a read.

IOD Directors Course Good Value

Review of Companies Directors Course – IOD
Becoming an Informed Board Member – a $6500 Investment

For the week of Nov  7 – Nov 12, I subjected myself to  the IOD Companies directors course.  Everyone, including my sponsors, The EDANZ- Deloitte Partnership (Escalator), wants to know was it worthwhile?

The real test of this will only be proven by my performance: both as a CEO –GM and as a value add board member.

It’s a big commitment by any one in a senior role to attend a week-long residential course and clear enough mind space to maximize your attendance.

So my highlights of the week:

  • The fellow attendee’s – I was privileged to attend with a great bunch of peers from a variety of backgrounds and experiences. Everything from VC’s, Fontera sponsored farmers, SFO, SOE CEO’s to tourism operators.
  • When you need to nominate board members, its ideal to have worked with them  before . This week created a great opportunity to experience people in action. A large percentage of the co-attendee’s I will recommend into future fellow board seats.
  • The debate a rigor my fellow attendee’s gave the presenters – challenging the bounds of traditional governance and relevance for new world post GFC and potential directors in “the gallows”
  • Case study work – “yes I am usually not a fan of this learning style”, but working on our fictitious “pacific pies ltd” and other companies, with no perfect answers, created great debate and enabled the various knowledge from fellow attendees to be shared.
  • Most of all it reinvigorated my belief in what high performing problem solving team can achieve with complementary skills.

So what about the content and delivery?

  • It would be easy to be overly critical – some of it could do with a major refresh and more creative flair – but it achieved the desired end result. (ok -the power point sucked – happy to help IOD here if they want)
  • The caliber and relevant experience of the majority of presenters was bang on – we all loved being given a “rally up” by an experienced chair and the frank and honest answers to probing questions by the pragmatists.

Would I recommend it?

  • Hell yes, I have come away more confident on my fudiciary responsibilities, a greater respect for risk and confident in adding more value to my clients as a result of it and more capable of maximizing the value from boards I report to.

Tips for potential attendees:

  • Verify with IOD what sort of background other attendees have. It sounds like not all courses have senior experienced commercial practitioners attending.  Auckland has a reputation for gathering a better crowd than some other locations.
  • Get involved and ask presenters challenging questions – it was the question and answer time that generated the most learning.

 

There is no doubt that IOD hold the body of knowledge as far their heritage and credibility. My hope for 2011 is that they can find ways to work with the growing Springboard Network to lead a charge in establishing benchmarks for effective boards for emerging SME’s as well as serving the big end of town.

Thanks to the EDANZ-Deloitte team for sponsoring my attendance. I plan on merging the learning from this informative week with my previous knowledge and experience to continue my personal quest to  help the emerging business talent of NZ succeed.

Other blog posts by Mark on Governance – Advisory Groups etc for SME’s

Staying out of Jail

Your fiduciary responsibilities as a director

For SME’s the focus of your Board should not be compliance and risk management – however, you cannot avoid your legal responsibilities in this area.

Many people ask me what are your basic legal responsibilities in this area and what are the major gotcha’s.  So here is my interpretation of your basic responsibilities – with a MEGA big disclaimer – I am no lawyer. If you what the definitive advice on this contact the experts such as the institute of directors (IOD)   www.iod.org.nz http://firstboards.iod.org.nz/home

Basic legal responsibilities as a director:

  • The company does not “trade recklessly” i.e operates a “a going concern” (is solvent) – i.e  You as a board do not agree, cause or allow to carry on business in a manner likely to create a substantial risk of serious loss to the companies creditors.
  • You act in good faith and belief that you are acting in the “best” interests of the company
  • You operate with the skill, care and diligence of a reasonable director in the circumstances – ignorance is no excuse!

Some gotchas:

  • Abstaining or voting against a decision does not absolve your responsibility as a board member. The board is jointly responsible for all decisions
  • Absence equally does not excuse your responsibility.
  • Risk and audit committees can not decide – they can only recommend t o the board
  • Make sure you have adequate information to make decisions and if in doubt seek external advice.
  • Trading outside the banking covenant’s
  • If you act like a director you may be “deemed “ by the courts to be a director

 

What is the difference between an Advisory Group and a Board?

 

–       Advisory group: is a group of people who provide advice and have no decision making power.

–       Board: is a decision making committee appointed by the shareholders and holds ultimate responsibility for the legal requirements of a company:

  • Board of Directors Section 128(1) of the Companies Act 1993 states that “The business and affairs of a company must be managed by, or under the direction of or supervision of, the board of the company”.  A board is composed of directors elected by shareholders.

Professional directors will not accept directorships without performing due diligence on the company first.

Due to fiduciary responsibilities many advisors will offer to become Advisory board members on a trial basis before you establish your first board.

For business owners establishing an advisory group gives you the chance to learn what it is like to work with a team of professional advisers before handing over the reigns and control to an external board

My closing comment:

For Business Owners: “Make sure your board members are aware of their responsibilities – get them to attend the week-long IOD Companies director course. But most importantly make sure their legal responsibilities are not a permanent stuck hand brake on your business.”

For Directors: “As a director develop you own personal risk mitigation plan (more on this later) then get on with adding value to the company”

Other blog posts by Mark on Governance – Advisory Groups etc for SME’s

The power of great boards for SME’s

Boards: Leadership – Value Add or a Necessary Overhead?

There is still mystique and miss-understanding what relevance boards have for SME’s.

Do you have a high performing board, inspiring your business?

SME business owners continue to shy away from establishing or maximizing the value of their board or advisory group. These business owners are missing out on the most cost-effective business tools.

For many, it could well be a throw back from what appears to be era of dysfunctional corporate boards i.e. the lack of good role models.  For others, perhaps they simply do not know what they are missing out on.

There is hope on the horizon. I recently attended a week-long IOD (institute of directors) company directors course, with 24 others who were willing to challenge the norm, while acknowledging the great heritage and knowledge from the past masters.  Watch out for these 40-50 something’s who are keen to set new benchmarks in governance.

I believe in the next few years a new wave of governance will emerge, as the  “old chaps” brigade run from threat of potential liability and litigation from their dysfunctional past and a new bread of “value add” board professionals will emerge.

This is a first blog post of a series on the topic governance for SME’s, in which I intend on exposing why and how leverage effective governance for SME’s.  Using a board the purpose of growing your business rather than just mitigating risk.

So what can you expect from a great advisory group or board?

Great board’s bring:

  1. Value to the company – improving the performance, beyond what would be achieved without them
  2. Awareness of the fiduciary responsibilities and risk management, but doesn’t act as a hand brake on the business
  3. Fresh thinking – challenging the norm – creating a new future, not just repeating the way they did in the past
  4. Personal support and motivation to the CEO – owner as well as other key executives of your company, keeping them on track to achieve their goals
  5. A radar for problems, with a willingness and capacity to act, rolling up their sleeves as an immediate response unit in times of crisis.

Simply put you board need to be the best performing – value for money team in your business.

No advisory group or board yet?

If you have a business plan, then you are ready for your first step into governance.  Establish an advisory group now!

 

If you have a board:

– Do they pass the 5 check point test above?
– Do you look forward to board meetings?
– Do you cringe at the thought of preparing pointless board papers?

Then it may be time to review -change your board.

Effective boards are not hard work, they add value and accelerate success.

The label of “governance” for many has the stigma of grey haired old men at the gentleman’s club, do you have a better handle for this activity – to help me in my crusade to bring better high level support to our emerging SME champions.

 

Let me know what issues you have with governance for SME’s and I will post an answer.

Other blog posts by Mark on Governance – Advisory Groups etc for SME’s