Executive succession in entrepreneurial business
Lloyd P. Steier
Executive succession represents a significant transition within a business wherein anincum bent leader passes on the authority and responsibility for the operation of the firm to a successor. As leaders greatly influence firm strategy and performance, succession is a most important aspect of long term survival and success (Miller, 1993; Lee, Lim, and Lim, 2003). For entrepreneurial businesses, next to overcoming the ‘‘li abilities of newness’’ (Stinchombe, 1965) encountered at start up, succession of the Founder CEO (Wasserman, 2003) is the most critical event relative to survival. In essence, this transition largely determines whether the busi ness will continue beyond the life of its founder. On a more general level, many researchers have observed that every succession event is potentially a precarious time for firms, as executives and organizational members mutually adjust to new strategies, roles, routines, and relationships (Haveman, 1993).
There are a number of factors and events that precipitate executive succession in entrepreneurial businesses. At the personal level, these factors include age, changing interests, good or bad performance, illness, or death. At the organizational level, Wasserman (2003: 152) found two events that typically influence succession: ‘‘the completion of product development and the raising of a new round of financing.’’ Each of these events signals the need for a new set of management skills. Wasserman further observed that, paradoxically, it is the achievement of ‘‘critical milestones’’ in entrepreneurial business that ‘‘actually causes the chance of Founder CEO succession to rise dramatically.’’
The Challenges of Executive Succession in Different Types of Entrepreneurial Businesses
The challenges of executive succession are both considerable and varied. As entrepreneurial businesses can be defined in multiple ways, it is useful to discuss succession challenges within the context of varied definitions or ‘‘archetypes’’ (Miller, 1983).
Entrepreneurs, acting as founders, create new organizations. A common definition of entrepreneurship contends that entrepreneurs, acting as founders, create new organizations (Gartner, 1988). Initial succession marks a significant event in the life of a business because it is a transition to a professionally or family managed firm. From this perspective, entrepreneurial businesses are new firms created and run by owner managers; succession represents the boundary or signpost wherein a transition is made from entrepreneurship to another stage.
Entrepreneurial businesses are often founded by charismatic leaders. This type of leadership presents the challenge of what Max Weber described as ‘‘institutionalizing’’ charisma (Davis, 1968; Haveman and Khaire, 2004). A further related challenge is transferring knowledge – both explicit and tacit – from the incumbent to the successor (Le Breton Miller, Miller, and Steier, 2004).
Founder CEOs (Wasserman, 2003) typically have four qualities that distinguish them from other CEOs: a greater emotional attachment to their firms, a stronger ownership position, greater control, and greater ability to remain in – or influence – a firm after they have given up control. These qualities present a further set of challenges relative to executive succession. Most notably they tend to provide the desire and the means to keep the business in the family. Al though that might be the stated intent, some times a founder’s identity is so intertwined with the business they are unable to complete, or even confront, succession in a meaningful way. Nepotism further complicates the process – particularly if it is excessive. Although nepotism is much maligned as providing a foundation for executive succession in entrepreneurial business 125 an inferior form of business organization (e.g., Max Weber’s notion of bureaucracy), in reality it exists widely and can be a source of business advantage. According to Bellow (2003), nepotism is a natural human tendency widely practiced throughout history. He further argues it needs to be acknowledged, understood, praised, and celebrated. In a similar vein, Lee, Lim, and Lim (2003) propose that it is not nepotism that drives the appointments of relatives in business as much as an economic rationale which at tempts to reduce the risk associated with engaging outside agents. Sometimes family members make the best candidates to replace an incumbent CEO, particularly when the succession process is handled properly. Thus, in matters of executive succession, the challenge for family businesses is to recognize the natural tendency towards excessive nepotism (the rigors of the marketplace are not kind to incompetent heirs) while being mindful of the advantages that it provides.
Entrepreneurial businesses create something new and innovative. A second definition of entrepreneurial businesses posits that they innovate and ‘‘create something new, something different; they change or transmute values’’ (Drucker, 1985: 22). This definition subscribes to Schum petariannotions that entrepreneurial firms are engaged in new activities that result in new combinations of means of production. According to Schumpeter (1934), entrepreneurial firms can be identified by strategic behavior that would include any of the following: the introduction of new goods or services, opening new markets, opening new sources of supply, and industrial reorganization. This notion of entrepreneurship assumes that innovative activity – not age, size, or founder characteristics – is the most relevant factor. Within this context, Aldrich (1999: 80) makes a useful distinction between ‘‘reproducer’’ and ‘‘innovator’’ organizations. He defines reproducer organizations as ‘‘those organizations started in an established population whose routines and competencies vary only minimally, if at all, from those of existing organizations,’’ whereas innovative organizations are ‘‘those organizations started by entrepreneurs whose routines and competencies vary significantly from those of existing organizations.’’ In effect, reproducers have an existing roadmap of roles and routines to follow; innovators do not. In matters of executive succession, innovative firms often illustrate an interesting paradox. For some of these firms, sustainable competitive advantage is derived from having ‘‘heterogeneous and idiosyncratic’’ resources and capabilities that cannot be easily imitated by others (Hitt et al., 2001: 482). The ‘‘know how’’ or ‘‘recipes’’ residing within the leader can be one of these resources. Thus the very source of competitive advantage can suddenly become a disadvantage if the hard to imitate resources and capabilities reside primarily within the leader and are not appropriately reproduced in the succession process. In cases where a firm’s roles, routines, and recipes are highly idiosyncratic, insiders or family members often make suitable successors simply because they have had the most appropriate apprenticeship. However, it is important to recognize that there is a huge difference between replicating existing roles and routines and in venting new ones. Firms that derive their competitive advantage from continuously inventing and implementing new roles and routines may need to search more widely before an appropriate successor is found.
Entrepreneurial businesses are growth oriented. A third definition of entrepreneurial businesses is that they have an orientation towards growth (Wasserman, 2003). As they grow, they encounter a well known cycle of ‘‘evolution and revolution’’ (Greiner, 1972) wherein they proceed through predictable stages with an accompanying set of new crises. These crises require a new set of skills from their leaders that must be either learned by the incumbent or acquired through executive succession. Individual action must be accompanied by delegation and control; innovative activity must become institutionalized within the organization. Common transition challenges that must be met by founding entrepreneurs in growing firms include moving from doing, to managing, to managing man agers. Thus, in growth oriented firms, it is often not enough to simply clone the existing CEO; required skills must be identified and accessed.
Important Stages in the Executive Succession Process
There is general agreement that executive succession should be a process, not an event. Al though numerous researchers have used a varied terminology to describe this process (Dyck et al., 2002; Miller, Steier, and Le Breton Miller, 2003; Le Breton Miller, Miller, and Steier, 2004; Sharma, Chrisman, and Chua, 2003), executive succession in entrepreneurial businesses can be characterized as having several discern able stages.
Anticipating the need for a successor. The precept of key stakeholders accepting the need for change before meaningful change can occur (well developed in the change literature) clearly applies to matters of executive succession. Un willingness to confront retirement is merely one of the issues at this stage; others include recognizing and accepting the need for a new skill set.
Anticipating strategic direction and needs of the organization. An organization needs to have reason able clarity about the nature of its business, products/services, markets, and competitive strategy. The selection of a new CEO must be compatible with an organization’s intended direction.
Identifying suitable candidates. As already suggested, activities within a firm, such as replacing a charismatic leader, achievement of certain milestones, or a new round of financing, all dictate unique strategic imperatives requiring differing skill sets of the CEO. Candidate selection must match strategic intent.
Acquiring the appropriate skill set. Depending on the strategic direction and succession availability, a firm may choose to go ‘‘outside’’ or ‘‘inside’’ the firm when choosing a successor. Some firms elect to choose a new outside CEO who possesses a set of skills the firm cannot easily acquire. For example, firms that raise additional financing through an initial public offering (IPO) find it helpful to recruit someone with IPO experience. Other firms, particularly those with idiosyncratic roles and routines, choose to recruit and develop insiders (Le Breton Miller et al., 2004).
Passing the baton. The relay race, wherein the actual passing of a baton is critical for team success, is a commonly used metaphor in executive succession. In essence, incumbents and potential successors must choreograph a harmonious transfer of power and responsibilities (Dyck et al., 2002).
Post succession activities. Retired CEOs of entrepreneurial firms often continue to influence the business after they have given up control (Was serman, 2003). Although ex CEOs represent a wonderful resource repository, factors such as charisma, strong emotional attachment to the firm, and unresolved identity issues can lead to unwelcome meddling. Firms need to strive to adopt governance mechanisms that optimize the predecessor and incumbent CEO relationship.
Conclusion
In matters of succession, entrepreneurial businesses face unique challenges. First, the charismatic leadership evident in many entrepreneurial businesses is hard to duplicate. Second, entrepreneurial firms tend not to have established roles, routines, and networks to the same degree as mature firms. Third, entrepreneurial businesses often exhibit idiosyncratic roles and routines that are hard to replicate. Fourth, owner founder firms have the option of passing on the stewardship to a family member; nepotism, albeit much maligned, presents some advantages for family firms, along with its own unique challenges. Fifth, some entrepreneurial firms have neither the time nor the resources to develop an internal managerial talent pool. Sixth, entrepreneurial businesses with a strong orientation towards growth typic ally encounter new crises as they grow.
Entrepreneurial businesses also manifest at least three distinctly different organizational forms, each with its own accompanying set of succession challenges. New businesses created by owner founders face the challenge of institutionalizing charisma, as well as transferring explicit and tacit knowledge from the incumbent CEO. Innovative businesses face the challenge of reproducing idiosyncratic roles and routines. Growth oriented firms must access new managerial skills that are not easily found within the executive succession in entrepreneurial business 127 firm. Research suggests there is no ‘‘one best’’ candidate to assume control and, depending on a firm’s needs, suitable successors may be found among family members, personnel within the firm, or outsiders. Finally, succession is usefully viewed as a process involving a series of stages.
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