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Jan 10, 2024

The Case of the C-Suite Shuffle

Episode Summary

Leon no longer wants to be the CEO of the company he founded. He makes his decision after completing an exercise Heidi suggested to him in Episode 5 – “The Case of the Frustrated Founder." In this segment, Heidi helps Leon take the steps needed to communicate his decision to the board, identify and onboard a new CEO, and transition into a new role and happier life.

Full Transcript

HEIDI: Welcome to The Startup Solution and “The Case of the C-Suite Shuffle.” I’m Heidi Roizen from Threshold Ventures.

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Today we’re continuing on from our last episode, where we met founder and CEO Leon. Leon was hating his role as CEO but didn’t quite know what to do about that. In the last episode, I walked him through an exercise to map out the company’s needs, consider his own skills and desires, and then think through how to maximize the potential for the success of both.

Now it’s time to help Leon figure out where to go from here. But before we find out what direction he’s decided to take, let’s cover some of the options available to a founder facing this same situation.

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The first option is to stay in the CEO job but find a combination of coaching, other resources, or perhaps some other hires to augment the areas that are problematic to them. Some CEOs decide that all they need is a chief of staff to help them stay on top of the job. I’ve seen this work well many times, but I’ve also seen it be a waste of time and money and, even worse, end up distancing the CEO from the relationships and information most critical to them. If a chief of staff is something you’re considering, the Harvard Business Review has a great article about how you can think through the pros and cons, and I’ve posted a link to it in the show notes. 

But whether it’s augmenting the CEO role through additional hires, training, or even bringing on a chief of staff, all these solutions may not solve a problem like the one Leon actually has. In the end, if he’s the CEO, the buck’s still going to stop at his door -- and he’s still going to be held accountable even for the stuff he hates.

This is true even when the hire is a chief operating officer (COO). Many founder CEOs have the expectation they can hire a COO to do all the stuff they don’t like to do – which is often everything but product development. They believe this will release them from the responsibility to manage or even understand what’s going on in sales, finance, HR, or any of the other things they don’t find interesting or don’t enjoy being involved with.

But this is a fallacy. I call it the BOTL principle. BOTL stands for “butt on the line,” and in my book, if you’re the CEO, it’s still your butt on the line for the things that ultimately report to you, even if you have a COO dealing with the day-to-day stuff. So, if you’re the CEO, and you can’t explain to the board why sales are off 20 percent and what you’re going to do about it, you’re not doing the job of the CEO. And if you don’t want all that responsibility, then the best option is to find a new CEO and define a new role for yourself. And that’s where Leon seems to have landed.

LEON: Hey Heidi, thanks again for helping me think through everything. I’m in an airport lounge. I’m flying back after a couple days of meetings with our biggest customers. I got to talk technology, product, solutions, roadmaps – I didn’t use the phrase cash flow once. This is what I’m happiest doing – doing the CTO stuff. I just love it. So, I think we need to start the process of finding a new CEO to take us to the next level. Now I need to know how to actually do that. So, could you call me sometime and help me walk through those steps so we can get this done? Thanks.

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HEIDI: Luckily, the first steps Leon needed to take have already been accomplished. Through the prior exercise, Leon already laid out the major priorities for the company, the job description for the CEO, and the job description for himself as CTO. So, he’s already nailed down the why and the what, he just needs to get through the how.

As for that how, he should first speak one-on-one with each of his directors, starting with the chair or lead director, or if he doesn’t have one of those, then the person he believes is the most influential board member. He should explain his thought process, present the CEO job description he came up with – and the description of the job he wants to do – and seek feedback and support. In my experience, it’s rare for a director to reject a founder’s proactive plan in cases like this, so I’m going to presume a good outcome here. 

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Next, Leon should repeat this discussion one-on-one with each person on his board. I think it’s best to have these discussions one-on-one so that each person feels comfortable expressing any opinions or concerns about bringing on a new CEO – or about Leon transitioning his role.

In Leon’s case, and typical for startups at his stage, his board members are also his largest investors, so he doesn’t need to take the discussion any wider for now. And at this point - he shouldn’t! A CEO change is a big deal, and you want to keep the people in the know to a small, trusted circle until a plan is sorted out. News of this getting out too early to the rest of the company can do damage, and outside the company, it can become even more problematic.

Once the entire board is informed and each member is generally aligned with the path forward, Leon should ask the board to have a session without him to confirm and approve the plan. This includes approving the new CEO’s and Leon’s job descriptions. This process might seem long and heavy to you – but it’s far better to confirm alignment and sort out any issues upfront before you start recruiting a CEO and before a founder starts transitioning their role.

Since Leon is also changing roles, he should expect that his compensation will likely change. And of course, a new CEO will also need to be paid, both in cash and equity, which will need to be allocated by the board. As I’ve said in the past, I’m a huge proponent of compensation consultants for helping to create comp programs, including for senior executives. They’re super helpful in designing programs that are internally consistent, aligned with the company’s comp philosophy, and reflective of current market conditions. This is a critical hire and a critical transition for the founder too, so it’s worth spending a few bucks on a consultant to get it right.

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As for recruiting that CEO, a lot depends on the stage and situation of the company. Some companies use recruiters, some have board members work their networks, while some might already have a candidate in mind, including possibly an internal candidate. Some might have investors like Threshold, where we have a talent partner who can assist with organizing the process and may even have some candidates to consider.

Ultimately, this is not that different from any other senior executive recruitment process, and all the usual advice applies to comprehensive interviews and reference checking. But let me put one thing at the top of the list for this kind of transition where the founder is staying on in a new role. From my experience, it’s critically important for that person to have a big say in who gets hired – even so far as a veto.

These transitions work way better when the founder is fully behind the decision of who to hire. Also, the founder usually has an intimate sense of company culture that the board may not have, and that’s also important to consider when choosing a new CEO. And, of course, once that new CEO is on board, the working relationship with the founder will likely be the key determinant of success or failure.

Let me talk for a minute about who should be involved in the interview process. This is a tough one because I generally like to err on the collaborative side of things and involve people in decisions that will ultimately affect them. But I’ve seen this backfire with a CEO or even COO hiring process. If you have your C-suite interviewing candidates, you may end up with your team divided about who to hire – and the ones who liked someone other than who you chose may start off the new relationship with an air of disappointment. It’s only human nature, but it still makes it harder for the new person to be effective.

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Second, for the people in these positions, they’d effectively be interviewing their future boss, and it’s also only human nature to consider ‘how will this affect me’ in that process. While you want this new CEO to be effective at managing all their reports, you still want to hire the best person for the job, not simply the person your team thinks they’d be the happiest reporting to.

Hard as this is, I prefer to limit the interview process to the current CEO and the board. If you’re using one, a professional recruiter usually does some screening interviews, which can be helpful to the process by homing in on four or five candidates before the board gets involved.

Personally, I’d recommend only involving your C-suite when you have a final candidate. This last step isn’t so much an interview as an opportunity for your execs and the final candidate to meet each other and socialize the idea of working together. On rare occasions, the process blows up at this point with one or more execs vehemently opposed to the candidate. That’s painful, but I’d still argue that it’s better than having it happen after the person is on board. Luckily, it also happens pretty rarely, and when it does, you should still have some other candidates in the loop.

Oh, and one final point: this entire process, like most important processes, takes time. Most CEO transitions I’ve been involved with take four to six months. It would be foolish to give yourself insufficient time to make a decision as important as this one, so be prepared for a healthy stretch of time to get it done.

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OK. So, let’s move on to the point where the new CEO is identified and accepts the job.

First of all, Leon should spend a lot of time with the new CEO, both inside and outside the company, to get to know each other as well as align on strategy and process – and to create a strong pattern of communication between them.

However, remember: the new CEO reports to the board, not to Leon, and it’s up to the board to set the new CEO’s priorities – and manage that person. Leon, as a board member, has a role in that but should be very careful not to overstep his bounds. The other board members should also be spending time with the new CEO one-on-one to develop their own relationships and communication patterns.

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For Leon, probably the hardest thing he’ll have to do is to learn and respect the boundaries of his new role going forward.

The biggest mistake I see founders make when replacing themselves as CEO is to circumvent the new CEO when they don’t like a decision that the new person makes. I totally get why this happens. Someone like Leon is used to calling the shots, and it’s hard to let someone else take over - especially if you don’t agree with them. Plus, as the founder, CTO, and major shareholder, Leon still carries enormous weight with the team as well as with the board, regardless of his title. Even a minor or a side comment from him will still pack a big punch, and so he’ll need to be extra careful when expressing his opinions.

When I call out an entrepreneur for doing this, their usual reply is ‘well I was fine deferring to the new person until they made a decision I didn’t agree with.’ Well, yeah, but guess what, if you undermine someone every time they make a decision you wouldn’t have made, you teach them to never make a decision without you. Which means, you can never get yourself out of those loops, which was your goal in the first place!

One simple hack I’ve found to letting go of decision-making is to come up with an acceptable error rate in your head for the new person. For example, let’s say you are willing to live with a 20% error rate. What that means is if roughly 20% of the decisions the new CEO makes are ones you would not have made, you let them go, particularly if they are not mission-critical. Keeping this in your head will help you make space for someone else to grow into their role.

Another simple hack when you don’t agree with something is to think, ‘will this matter in a year?’ Surprisingly, most issues are just not that important, so why undermine a new person? I’ve witnessed a founder go to war with a new CEO about what the appropriate tchotchke would be to give out at a customer appreciation event. I mean, is that really worth causing trouble over? I think not.

Now, if that error rate proves higher, it’s time to talk to one of your board members to get some perspective. And if that person agrees that there may be a problem, it’s probably time to talk with the new CEO one-on-one about those issues. And yes, sometimes you do end up picking the wrong person, and you have to start over. Just make sure before you hit that eject button that it’s truly an issue of bad performance and not just your desire to have things your way. If that’s the case, you’re not going to solve the problem with a new person either.

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Leon’s board and even the other C-suite executives should also play a role in helping this transition go smoothly. By admitting up front that Leon might need some help transitioning out of the CEO role, he can ask his fellow C-suiters and his fellow board members to call him on any foot faults. He could even have a safe word that he shares with those he entrusts so that they can redirect him in any meeting without creating a lot of embarrassment. One team I worked with chose the word ‘timeout,’ which was pretty descriptive and clear to everyone what was going on. Another team chose the word ‘gob smacked’ with the intent of being more stealthy. But it turned out that gob smacked is a pretty hard word to drop into a conversation. It became pretty obvious why the word was being used, which actually lightened the tension in the room and made everyone laugh a little.

I have one other piece of advice to help founder CEOs hand over the reins. As soon as the new CEO has had a few weeks to settle in, duck out for a little while. By taking a couple weeks off where you’re unreachable except to that new CEO and one or two board members, you’ll create a CEO vacuum for the new person to fill.

You may not think this is that important, but it’s hard to actually break your own CEO habits, like always speaking first. Or standing in the front of the room. And one way to do that is to just not be there for a little while.

And remember, Leon will have a new job too! He’s now the CTO, a job he should understand pretty well, but one with its own responsibilities that he needs to lean into in order to make both himself and the company successful.

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So, what can you learn from The Case of the C-Suite Shuffle?

First, every founder has the duty, and I believe the right, to proactively think through the CEO question, and if they need help with how to do this, please refer to my prior episode, The Case of the Frustrated Founder.

Second, whether they choose to bring on a new CEO and transition their own role or bring on a COO to report to them, many of the same considerations still apply. And those include clearly defining the roles and allowing sufficient time to get the job done.

Third, the current founder/CEO should have a heavy hand–if not a veto–in picking the new CEO.

Fourth, once the new CEO is on board, the founder and the board should spend meaningful one-on-one time with that person to build relationships and healthy lines of communication.

Fifth, the founder should work actively to make the transition successful by publicly transitioning the role, working behind the scenes to support the new CEO in the early days, and setting an error rate for themselves to help them stay out of interfering with the CEO’s decisions. I think they should even consider taking time away from the company once the CEO is on board to allow the new structure to take root.

And finally, the founder should then focus on enjoying and excelling in their new role. After all, that’s what started us off when Leon called me. Life works a lot better when you actually love the job you have.

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HEIDI: And that concludes “The Case of the C-Suite Shuffle.” For the record, this situation is real, but Leon is a composite. And no startups were exposed in the making of this podcast.

Thanks for listening to “The Startup Solution.” We hope you’ve enjoyed this episode, and if you have, please pass it along to someone who could use it. I’m Heidi Roizen from Threshold Ventures.

Further Reading

Here’s a great article from HBR on understanding the role of COO: Second In Command

Here’s a good summary of the skills and responsibilities a startup CEO needs to have.

A long and thoughtful article about the founder-to-CEO transition, potential pitfalls, and how to do it right: Taking over from a founder-CEO:  Why it goes wrong and how to get it right

A useful guide about transitioning CEO power from chief executive, as well as a checklist for the new CEO.

Here’s a great outline of the chief of staff role and reasons from HBR: The Case for a Chief of Staff

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