Fast-growing founder-run companies are more likely than other companies to need strong boards — and less likely to have them. That's the message of a study by Annette L. Ranft and Hugh M. O'Neill.
The researchers looked at 91 U.S. companies whose CEOs also had been founders of the company and contrasted the 91 with enterprises matched for industry and size but run by nonfounders. Using a variety of statistical techniques, they identified significant differences between the two samples. Founder-run companies tended to have fewer independent outside directors and a greater concentration of ownership within the top management team. Not surprisingly, founder-CEOs had a larger ownership stake than non-founders and were more likely to serve as board chairmen. As a result, CEOs at founder-run concerns had significantly more power over their boards.
That may seem reasonable, considering the role that visionary leaders such as Steve Case and Bill Gates play in their companies' success. But giving a founder-CEO too much power can be a recipe for disaster, the researchers warn. Drawing on work in sociology and cognitive psychology, they explain how poor governance exacerbates what they call the “Icarus Paradox” —referring to the mythical figure who was overconfident of his own powers and fell to earth after flying too close to the sun.
Early success, the authors observe, can promote both inertia and recklessness. On the one hand, organizations that experience strong performance early in their history tend to become imprinted with change-inhibiting routines. Success also results in increased risk aversion for some entrepreneurs. On the other hand, Ranft and O'Neill say, “Success can breed a sense of invincibility in the entrepreneur and foster reckless action.” The hubris can take several different forms, ranging from refusing to take competitors seriously to overreacting to moves that might be interpreted as personal attacks.
Farsighted founders and investors can lessen the dangers by creating a check on CEO power in the form of a strong and independent board. By developing its own sources of information and analysis, the board can serve as an effective counterpoint to the founder-CEO. In addition, board members should give founder-CEOs incentives to build strong management teams and plan for succession.
Some entrepreneurs may resist restrictions on their independence.