Founder Power Gone Awry

18 Feb 2020. Bob Kaplan

Power sticks to founders like glue. 

Without it, founders might never get their enterprise off the ground, much less keep it there. But it also puts them at risk—the risk it will cut back on itself and the founder will, sadly, defeat the purpose. (A chief executive does not have to be a founder to wield extraordinary power (and be at risk of misusing or abusing it)—e.g., an entrenched, larger-than-life figure like Jack Welch of GE.)

Power accrues to the individual through force of intellect, force of personality, commanding knowledge from being there from the beginning, the driving force of passion laced with fear of failing. But there's more, much more. There's also the power of position—actually, two positions, founder and head. With founder-heads, position power rivals personal power.

There's yet another position or role available to founders—that of owner. A controlling interest—51 percent—trumps everything—51 percent of ordinary shares or, at places like Google and Facebook, enough shares of a special class of stock vesting owners with ten, or even twenty, votes per ordinary share. A founder or founders of a so-called controlled company can't be made to do anything. They have supremacy over the board. Even a large stake short of a majority share can have a chilling effect. A start-up's board rendered itself "timid" in the face of the founder's 42.5 percent stake.

Ownership aside, a founder-CEO is at considerable risk of misusing or abusing their power. A founder-CEO who is also a sizeable owner is effectively the organization's sole power—the mon-arch, as it were. And the risk shoots up.

The thing is, power corrupts. Or it can corrupt—corrupt in the sense of putting one's own needs ahead of the needs of the enterprise. The very definition of self-serving. "Power is so pleasant," wrote the 19th century novelist Anthony Trollope, "that men quickly learn to be greedy in their enjoyment of it."

Power corrupts financially. ‎A founder commits to a salary increase or a bonus for the COO and never gets around to it or agrees to a stock grant for board members and reneges. The founder's trustworthiness is shot and the people affected leave sooner than they otherwise would. Then of course there's self-dealing. A founder lends himself money at little or no interest or, worse yet, embezzles. 

Power also corrupts managerially. ‎A founder hires a COO, a crony, without consulting anyone; it goes badly. Another founder monopolizes decision-making; avoidable bad calls are the result. Yet another founder is perpetually 30 minutes late; those kept waiting read it as disrespect and resent it. ‎A founder, weak on process, builds an organization just as weak; it's chaos.

‎It's easy for founder-heads to take liberties, to indulge their urges, prejudices, discomforts, wrong ideas. It's so easy to make unilateral decisions. It's so easy to plunge ahead with ill-advised pet projects. It's so easy to interfere and undermine. It's so easy to slough off the usual managerial obligations‎. It's so easy to help yourself to something that doesn't belong to you.

The problem with outsized power is there's nothing to deny the powerholder those liberties, nothing to keep the individual in bounds. There are no checks—curbs against sins of commission. There are no balances—counterweights against sins of commission. No checks or balances with teeth in them. A venture capital firm can pressure the start-up for growth, or margin, but its oversight and control don't necessarily extend to the founder's day-to-day use of power.

‎It's almost as if founder-CEOs have dissenting voices on mute. Feeding into that dynamic is the aura—even a god-like aspect—that comes to surround the individual once the organization is up and running. I've heard it said, "Without so-and-so, this organization would not exist." It reminds me of Genesis: "In the beginning God created the heavens and the earth." The aura amplifies the normal tendency to defer to superiors. "Who am I to challenge her—she started this place." The danger is that people delegate up. At the extreme you have an organization of mindless followers, sheep that follow the tinkling of the bell.

Founders are perfectly capable of exalting themselves. Then they think they can do no wrong. They're omniscient, they're omnipotent. Success, then, is a poor teacher.

Theoretically, founders can control themselves, and some do. But others deceive themselves. They actually believe their wrongheaded notions. Still others know better but succumb to temptation. In the age-old contest between should and want, should loses out. And, again, there is no one on the playing field to blow the whistle or the founder is deaf to its shrill cry.

Worst case, the venture goes down in flames.‎ Almost as bad, it succeeds for a time but the harm done by the founder's failings and limitations catch up with it. Sole reliance is untenable. Success is not sustainable.

The familiar story can go like this. A founder creates a company that at its pinnacle is worth upwards of a billion dollars. Early success showers wealth on him and he begins to believe he's invincible. One by one, he replaces his strong-minded staff in favor of the like-minded, and his escalating power goes unchecked. Enamored of technology coming out of the lab, he decides against objections to invest tens of millions into what he hopes will be the next big thing. The money goes down the drain, just at the time when the charter product's sales and profits are dropping. It is not long before the company is purchased by a distressed-assets fund for a fraction of its peak value.

Yet organizations succeed all the time despite the out-of-line founder. For instance, a roll-up built upon mainly well-chosen acquisitions that are then adequately managed and not over-managed. It throws off oodles of cash for years despite founder antics that waste time and energy and drive senior people crazy. But a few senior people, strong characters as well big contributors, are able to act as counterweights.

Some founders actually go the other way. Out of a distaste for power or discomfort with it, they shy away—they're not direct or demanding enough—and they don't fill their role.

Those who make responsible use of power have their egos in check and their moral code keeps them in bounds, but they are comfortable with power and not inhibited about using it. They have no problem telling people what to do and holding their feet to the fire—yet they are usually constructive. They have no trouble holding their ground yet can, within reason, be moved off their spot. Their thinking can soar but they are described as "grounded," "down-to-earth." Importantly, they're not overly impressed with themselves. Crucially, they accept offsets.

At their core, founders of this type put the good of the organization above their personal needs. Nothing defines founder power used responsibly better than that, just as it is the inability or unwillingness to subordinate one's needs to the larger good that best defines founder power gone awry.