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What happens when founding CEOs go bad - the sequel

This is part two in a series on founding CEOs. Part one proposed that founding CEOs typically stick around longer than they should. Part two attempts to provide a logical framework for the key conclusions reached in part one.

This is part two in a series on founding CEOs. Part one, in which I did get a bit carried away with a rotting fruit metaphor, proposed that founding CEOs typically stick around longer than they should. It went on to discuss the role and effectiveness of boards of directors in this process.

This post attempts to provide a logical framework for the key conclusions reached in the earlier post. Check it out:

Life is full of obstacles. Sometimes they're external, like earthquakes, competition, or pain-in-the-ass neighbors. Oftentimes we create our own problems. We call that being our own worst enemy. In any case, everyone faces barriers that are challenging to overcome. Sometimes we succeed, more often we don't. That goes for CEOs and companies, too.

This concept isn't limited to human behavior. It happens to animals and plants, even to planets and galaxies. Disease, draught, global warming, and intergalactic collisions are examples. In life there are biological factors, to be sure, but if you go deeper still, you find that the underlying cause is physics - thermodynamics, to be specific. It's called entropy.

Entropy - known in the human world as "s--t happens" - is actually a truth that goes far beyond car accidents and getting caught cheating. It describes an ever-increasing randomness that creeps into everything and can wreak havoc on otherwise organized systems.

Now, let's apply that to CEOs and companies. Executives spend most of their time working to meet operating goals. Time is precious and not much of it is spent anticipating and assessing external and internal strategic threats - that's consultant speak for the s--t that inevitably happens to companies.

While understandable, this means that executives often-times fail to recognize strategic threats or are not able to overcome them in time, i.e. before something bad happens that impacts operating results. That goes for both external events - such as changes to the competitive landscape, and internal issues - like technology development challenges.

Sometimes this is a one shot deal. Fine. Other times the behavior appears to be more systemic. In other words, for whatever reason, the CEO's decision-making or ability to rise to the challenges of office appear to be consistently, or at least often, ineffective. It doesn't matter why, only that it indeed happens, in fact happens to all of us. The only difference is that we are not all in a position to impact jobs, 401Ks, and shareholder value. In any case, boards are supposed to oversee CEO effectiveness and step in when that appears to be compromised.

Generally, I believe that boards cut founding CEOs more slack than they should. While this is my observation (there is no objective data on the subject that I'm aware of), there is also a logical basis for that conclusion. While boards may have the charter, they oftentimes don't have the tools, the information, the time, or the risk profile for effective executive oversight. I explained this in some detail in the first post on the subject.

Here's an example of what I'm talking about. Rather than pick an obvious one - there are lots of those - I've chosen a beloved CEO, one that a respondent to my original post named as a counterexample to the premise. Let's take a look at Scott McNealy and Sun Microsystems.

By any measure, quantitative or qualitative, Scott was an extraordinary leader and manager. Excluding the bubble (I always exclude the bubble), he led Sun from startup to roughly $20B in market cap, an extraordinary achievement. Now, let?s break that down a bit.

From 1987 to 1997, Sun's market cap grew roughly 1000%. Again, extraordinary performance. But over the next decade - again, excluding the bubble - the stock essentially flatlined, significantly underperforming its peers and all major market indices. Sun's stock price today is roughly the same as it was ten years ago.

Note that we're not talking about short-term performance - something that can be construed as an aberration. The second half - an entire decade - of Sun's performance as a public company has been poor, to say the least. If you bought SUNW in the past ten years, you're not likely to be a happy camper. That affects lots of shareholders and employees - numbers with lots of zeros at the end.

Sun is a public business and that business is literally owned by its investors. Executives serve at the pleasure of the board of directors and the board of directors are elected by the shareholders to govern those executives, including hiring and firing the CEO. In that sense, and from a long-term shareholder value perspective, Scott has not been effective for the past decade. There's no spin you can put on it that changes the result. Is Scott at fault? If you asked him that question, he'd likely say of course. After all, he was the CEO; the buck stopped with him. Why did it happen? Who knows? HP ran into similar growth and profit pressures. The board hired Carly Fiorina. That didn't work. Then they hired Mark Hurd. Problem solved.

I know, we can have an entire discussion about what Scott did or didn't do to meet changing market conditions, and why. But that's irrelevant here. The point is simply this: there was essentially zero growth in shareholder value for a decade. The CEO is responsible for that performance, and his failure to act effectively for that long should have fallen on the board's shoulders.

I could be wrong, but in my opinion, AMD, Atmel, Cypress Semiconductor, and LSI Logic, to name a few, kept founding CEOs in the saddle for too long, perhaps almost a decade too long. Their stock performance tells the story. But keep this in mind: like Sun and McNealy, these are all once-successful companies with CEOs that made a difference. This is not a criticism; it is physics.

Back to the beginning of the original post: Bill Gates took his company literally from startup to the top of the corporate world, in terms of market cap, and then turned the company over to the man he groomed as his successor. There were plenty of obstacles along the way - entropy didn't take a vacation for Microsoft - but Gates handled them effectively. I don't know if that makes him one in a million or one in 100,000, but as founding CEOs go, it makes him very special indeed.

Intel rotates executives periodically, including the CEO. It's the way the company operates. It's also not a bad idea. New leaders take a fresh look at strategy, and that may be the best way to keep entropy at bay.