Are directors of founder-led companies being set up to fail?

The story is familiar – the visionary founder builds a successful company from scratch but as the business matures, they obstruct effective oversight. Time and again, as another boardroom drama breaks out, independent directors wonder: can a founder-led company ever truly be governed?
The drive and boldness of these leaders is essential in the early stages of growing a business. But without proper checks and balances, an over-reliance on one individual can lead to more risk taking and poor decisions. Failure is often praised as a lesson for success but there can be huge costs.
Recent turmoil at OpenAI, Tesla and WeWork highlights the complexities of balancing founder influence with the structures needed to safeguard a company’s future.
“All founder CEOs need to think about evolving their company from founder-led to founder-inspired,” says Jason Baumgarten at headhunter Spencer Stuart. “By establishing a strong board of directors, having clear boundaries to their own roles and being aware of their outsized influence, founders have a better chance at ensuring their company can grow… beyond their leadership.”
Success depends on whether the founder wants this shift, rather than being forced into it by investors or regulators, he adds.
Even then, they may retain control over key decisions and leadership appointments through voting rights that in effect mean they have not ceded much power at all.
Other founders may leave but still hold shares or meddle from the sidelines. Howard Schultz, who did not start Starbucks but led the aggressive expansion of the coffee chain, returned to the helm twice after stepping down and has had huge sway over the board. Peter Hargreaves, the co-founder of UK financial services firm Hargreaves Lansdown and its largest shareholder, has publicly criticised the former management for presiding over “a shambles” that hit the share price. Were their actions in the interest of the company, preserving their own legacy or about financial security?
The merits of being in “founder mode” rather than “manager mode” have gained traction online after an essay by tech investor Paul Graham, titled Founder Mode. Many in this industry have celebrated founders who make quick-fire decisions and push through their vision with little room for dissent. These individuals may be inspiring and innovative but their style can make for workplaces that are toxic and often dysfunctional.
Companies require independent boards that support and motivate founders but are willing to challenge decisions. At earlier stages this may just be a chair role and down the line a full suite of directors.
“Lots of founders are concerned the chair is going to come in and fire them,” says Rachel Ingram at Cadmium Partners, a board services firm that specialises in tech companies. “But finding a skilled chair who can support them and help scale a business can be a game-changer.”
She says chairpersons that succeed “understand the mindset of an entrepreneur”. Those taking a more corporate view might “struggle”.
One director who sits on public and private company boards in the UK says he would think twice about joining a founder-led business, partly because egos often “limit the ability to listen to advice”.
Pippa Begg, co-chief executive of Board Intelligence, a technology and advisory firm, suggests directors do their due diligence properly and ensure their interests are aligned before joining a founder-led board. They should consider issues such as where voting rights lie and what powers directors have. For example, if a company wants to change a product line or regional focus, does it go to the board?
Looking for clues as to how a founder has worked with the board in the past can help directors understand how their relationship might unfold. “One should be wary of a board with lots of non-executive director turnover,” says Begg. “It can be the sign of a problem in a founder-led business where the only control you have is to vote with your feet.”
She adds that staff reviews of the way a founder interacts with their team on sites such as Glassdoor can give a sense of how they will work with directors. “Do they appear curious, like to empower and delegate, or is it [a] more hierarchical ruling of the roost. The former will probably welcome input, the latter could be allergic to it”.
Spencer Stuart’s Baumgarten agrees potential directors must investigate why the founder wants them.
“One of the most famous founders in modern history said to us of his board, ‘I want people who are generous – someone who thinks about my company when they don’t have to, when they aren’t in a board meeting, I want their best thinking time and ideas.’”
But he noted another founder had a more self-serving perspective – they wanted “mostly decent people who will not make [their] job more difficult”. “Understanding which you are potentially joining is incredibly helpful,” adds Baumgarten.
This will allow directors to decide whether it is worth entering the fray or prioritising self-preservation if they think they are being set up to fail. –Copyright The Financial Times Limited 2024