On May 11 last year, Lord Foster of Thames Bank stood down from the top job at Foster + Partners and handed the CEO’s job to one of his senior executives, Mouzhan Majidi. Although associated with some of the firm’s lucrative airport contracts, Majidi isn’t as well known as his boss. But he has been at the company since he graduated in 1987. A safe pair of hands to which to entrust the running of a company that depends heavily on the recognition generated by its founder’s name.
Norman Foster moved to the position of chairman, in a classic restructuring process. He’s 72, after all, and his firm is 40 years old. In last year’s changes, it brought in an outside investor: 3i injected £100m for around 40% of the shareholding. The private equity business gained a seat on the board and the prospect of a share in the company’s expected growth in Asia, the Middle East and beyond. An important part of the deal was the continued involvement of Lord Foster, who says he looks forward to being able to pursue his pet interests, which include nurturing new talent and opening new markets.
Like most successful successions, this was carefully planned. “I was keen to ensure the long-term future of the practice,” said Foster.
When the entrepreneur’s name is the name over the door, it is always going to be difficult to organise any transition, says Bruce Keith, director of growth capital at 3i. “It is impossible to find a replica of the focused, driven individual who founded the company. In the case of Foster + Partners, we put in a lot of work since getting involved in 2005, specifically to help him with that transition, and get the right board structure in place to bring the business forward.”
In denial
In succession matters as in so much else, failing to plan is planning to fail, Keith believes. At Foster + Partners, the effective retirement of its founder was an opportunity for broadening the investor base, bringing in capital for expansion and spreading the day-to-day management. But it is hard for an entrepreneur to hand over or dilute control of his baby, particularly in the more compressed timescales typical of smaller businesses. “Succession is one of the biggest problems entrepreneurs have,” says Dr Shailendra Vyakarnam, head of the Centre for Entrepreneurial Learning at CambridgeUniversity’s JudgeBusinessSchool. “Most are in denial. If investors are involved, they’re bound to be thinking about an exit at the end of a set period.”
Denial is understandable. Inventing a product and creating a business is intensely personal and for many it’s inconceivable that they should hand it on to anyone else to complete, according to Vyakarnam.
Professor Cary Cooper of Lancaster University Management School is even more emphatic. “Most entrepreneurs stay at the tiller far too long,” he says. “Their job is to create the business out of their passion and their ideas, but they need to know when to step aside. They are often the worst people to expand and sustain the business precisely because they are strong willed, driven, passionate – and obstinate. The qualities that impel the business at the start are not always ideal for managing it later, when you need highly credible and experienced people.”
Few founders have the objectivity not to appoint people in their own image, or to know if their own continued involvement is in the best interest of their business, says Cooper. The person he thinks best exemplifies these qualities is his former pupil Terry Leahy, a strategist whose attention to succession planning in every business in the organisation has been a factor in getting every department to add the maximum value.
Your vision
One technology entrepreneur who has successfully held onto the tiller as his company has grown to be worth $4bn in just over 20 years is Dr Mike Lynch. At 42, he has no intention of handing over the leadership of Autonomy Corporation, and because he can now raise funds any time he likes, he has no need either. “There’s no such thing
as succession planning,” he says, “it should be inherent in the business.”
As is the case with Autonomy, as well as attracting investors, a business that is growing fast and creating new markets for the future will always attract the best talent. “I started out as a visionary technologist, grew into an accountant, and have now gone back to being a visionary technologist,” says Lynch.
That may resonate with Norman Foster looking forward to pursuing his interests while leaving the day-to-day stuff in other hands, but while Lynch agrees that professional management is good for specialised functions like sales and marketing, he believes the entrepreneur is essential to the vision and the passion that make the company exciting to its customers. That vision can easily be lost at the early stage if the venture capital partner wants nothing more than a successful exit. Of course, not every
start-up delivers a 200% return for its backer, as Autonomy is reputed to have done for Sir Ronald Cohen’s Apax Partners.
Lynch says that some companies create value through service and consistency, others are opportunistic and predatory. They all have their place, follow some of the same rules, but have obvious differences. Yet they all tend to reject transplants.
“As time went on we managed to hire wonderful people, but in a technology company it’s hard to bring people cold into senior positions, much better to grow people from within,” he says.
But investors tend to stress the advantages of bringing in new blood. The managing director of ET Capital Martin Rigby has backed a stellar portfolio of technology companies, and says entrepreneurs are unlikely to be successful managers. “Founding entrepreneurs are often forceful and dynamic, but they may be chaotic and unpredictable,” he comments. “They can be suspicious, even paranoid, when it comes to sharing control.”
Technology companies often require several injections of capital early on, leaving the founder a minority shareholder by the time any question of succession comes up. But even entrepreneurial leaders who haven’t sacrificed equity and are used to leading from the front will need to relinquish power eventually. Succession strategy is not just a crystal ball exercise - it is essential to long term growth and a credible plan reassures potential investors that an exit won’t be impulsive.
Different businesses, different problems
Dr Shailendra Vyakarnam, head of the Centre for Entrepreneurial Learning at Cambridge, suggests that most businesses fall into one of three categories:
The high tech business – Knowledge is its asset: the entrepreneur’s shareholding is progressively diluted as capital is required for growth. Succession is built in
The family business – Make up 70% of UK companies. Succession planning is complex. The founder has the motivation of ownership; the middle generations may consider family succession important; but in subsequent generations motivation may decline. Half of all family businesses have no succession plan*
The professionally run business – If this is a service business with no prospect for exit, switching off the lights at the end of the game may be the only option
*Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08