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TMT Legal Update - Founder CEO or Professional CEO?

    • Technology, Media and Telecoms - Technology


    Precis – Michael Dell’s battle to reclaim Dell raises the question of whether tech firms are best led by founder CEOs or professional CEOs. Could the Facebook formula be the answer to this age-old question?

    What? The high stakes battle between Michael Dell and Icahn has been hot topic over the past six months and has gained some momentum this week. Dell has struggled to keep up with its rivals in recent years as consumers and businesses shift toward smartphones and tablets. Michael Dell wants to reclaim control of Dell in a bid to reverse the company's fortunes.         

    Various studies have considered the subject of founder succession over the last 10 years. Supporters of professional CEO leadership consider that founders are ill-equipped to lead a company. They argue that they are generally unable to manage growth and their passion is often blinding. For example, Noam Wasserman, a professor at Harvard Business School has published various papers on the subject. In his study, “Founder-CEO Succession and the Paradox of Entrepreneurial Success", Wasserman stated that what helps a founder become so successful in launching a company - his or her passion - can also detract from big picture managerial skills it takes to scale the company. His view remained unchanged in his 2006 paper, “Rich versus King”. In Rich versus King he concluded that founders who give up more equity to attract key executives and investors build more valuable companies than those who part with less equity. Google and LinkedIn are often cited as examples of tech firms which have succeeded under professional CEO leadership.

    Supporters of founder CEOs’ leadership consider the suggestion that founders are ill-equipped to lead a company to be entirely misguided on the basis that the individual who originally conceived of a company has to be the best person to guide the organisation through its various stages of maturity. Apple and Microsoft are usually cited in support of this model. This model is further supported by the mountain of evidence which suggests that tech firms often struggle without the guidance of their founders, Dell being an obvious example. And, of course the financial performance of Apple post Steve Jobs cannot be ignored. In July it was revealed that, whilst still vastly profitable, Apple’s fiscal third-quarter earnings fell 22%. Apple has also recently been replaced by Samsung as the world’s most profitable mobile phone maker. Whilst Steve Jobs was at the helm, Apple regularly posted start-up like profit and reigned for four years as the world’s most profitable mobile phone maker.

    So What? So which of the models is best? Looking at the evidence an overwhelming number of the most successful tech companies are led by founder CEOs. Amongst those companies are Facebook and Zynga. But, Facebook and Zynga have something else in common – a COO. They have adopted a hybrid model which allows them to maintain the leadership and product vision of the founder, while gaining the operating expertise of an experienced executive.

    So, it appears the answer to the age-old question is - both. The latest success stories in the technology sector show that there is no need to rigidly stick to either model. What seems to be important is that the founder remains in place to innovate but employs a strong operational person to add the leadership expertise founder CEOs often lack.

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