Much more than solv­ing a sum

The tran­si­tion of en­trepreneurs between CEO, di­rec­tor and share­holder is in­evitable, im­por­tant and com­pli­cated

Business Standard - - ISSUES AND INSIGHTS - MAN­ISH SABHARWAL & ASHOK REDDY

Now that the heav­i­est drama of the In­fosys and Tata episodes is be­hind us, it’s fi­nally pos­si­ble to speak up for founders and ac­knowl­edge th­ese were very dif­fer­ent sit­u­a­tions; Tol­stoy once said that ev­ery happy fam­ily is alike, but ev­ery un­happy fam­ily is un­happy in its own way. Founders of­ten have three con­cur­rent roles at com­pany birthing: CEO, di­rec­tor and share­holder. There is an in­evitable, im­por­tant and com­pli­cated tran­si­tion between the three roles, be­cause if you con­vert a high-en­ergy start-up into a bu­reau­cratic in­sti­tu­tion too early, you take away its birthright; too late and you take away its destiny. The three roles are dif­fer­ent. As CEO, your met­ric is per­for­mance; as di­rec­tor, it is gov­er­nance. As share­holder, your met­ric is long-term eq­uity re­turns. The Tata sit­u­a­tion has many lay­ers, but the one at In­fosys at­tracted a lot of sim­plis­tic sound bytes. We’d like to de­bate the three most painful: Founders can’t let go, board-man­aged com­pa­nies should ig­nore share­hold­ers and gov­er­nance is sci­ence.

The “founders floun­der” school of thought is clear: Founders have dif­fi­culty let­ting go, but should step down from their CEO role in their self-in­ter­est when the com­pany reaches a cer­tain size or age, be­cause it’s bet­ter to be rich than king. There is un­de­ni­able wis­dom for en­trepreneurs in politi­cian Mario Cuomo’s quip, “You cam­paign in poetry. You gov­ern in prose”. Keep­ing the trains run­ning on time is a dif­fer­ent skill set from get­ting the train out of the sta­tion. But it is sim­plis­tic to be­lieve that poetry and prose are se­quen­tial phases; great com­pa­nies strike the fine real-time bal­ance. Too much poetry and you do noth­ing; too much prose and you do noth­ing great. But even when founders in­evitably step back, it is im­por­tant to con­tinue car­ing. Hir­ing a CEO is like send­ing your child to col­lege (set­ting them free to do big­ger or bet­ter things) rather than putting your child up for adop­tion (of­ten an in­vol­un­tary and clean cut). The no­tion that the In­fosys founders should have sold their shares if they didn’t like what was go­ing on in the com­pany or board is un­fair.

The ar­gu­ment that founders — even if they are share­hold­ers — should leave “board-man­aged” and “pro­fes­sion­ally run” com­pa­nies alone was heard of­ten in both episodes. But the no­tion that com­pa­nies or boards should be man­aged with­out the voice of cap­i­tal is eco­nom­i­cally delu­sional. Peter Drucker in his 1973 book Man­age­ment wor­ried about share­holder cap­i­tal­ism, but in his 1976 book The Un­seen Rev­o­lu­tion he wor­ried about pen­sion fund so­cial­ism, where in­sti­tu­tional share­hold­ers don’t have the time or band­width to hold the man­age­ment ac­count­able. The prin­ci­pal agent prob­lem is ob­vi­ous in to­day’s com­pen­sa­tion for Amer­i­can CEOs, but it was more dra­mat­i­cally cap­tured in the great book Bar­bar­ians at the Gate (the takeover of Nabisco was partly fi­nanced by sell­ing a fleet of cor­po­rate jets). Board-man­aged com­pa­nies are not com­pa­nies that ig­nore share­hold­ers.

Fi­nally, gov­er­nance is the al­lo­ca­tion of de­ci­sion rights and is more art than sci­ence. Many boards pass the sci­ence test (in­de­pen­dent chair­man, em­pow­ered board com­mit­tees, in­de­pen­dent di­rec­tors, num­ber of meet­ings etc) but miss the com­mon sense tenets pro­posed by Ram Cha­ran — group dy­nam­ics, in­for­ma­tion ar­chi­tec­ture and fo­cus on sub­stan­tive is­sues. Surely, a good board pro­tects founders from them­selves. But it also, as Andy Grove of In­tel said, en­sures the suc­cess of a com­pany is longer last­ing than any CEO’s reign, any mar­ket op­por­tu­nity and any prod­uct cy­cle.

Th­ese two episodes have lessons for ev­ery­body. Lessons for founders: Don’t stay as CEO for too long or too lit­tle a time; his­to­rian Ra­machan­dra Guha in­sight­fully sug­gests Jawa­har­lal Nehru stayed one term too long in In­dia and Nel­son Man­dela left one term too early in South Africa. Also, don’t jump straight from be­ing a CEO to a share­holder; the tran­si­tion must in­volve an ex­tended pe­riod on the board. Les­son for CEOs: You will be judged by your prom­ises; none of this drama would have hap­pened if In­fosys was on track for $20 bil­lion. Les­son for board mem­bers: You must move the com­pany beyond its founders, but gov­er­nance de­pends on a com­plex com­bi­na­tion of the stage of a com­pany, state of in­dus­try, share­hold­ing (few ele­phants or many par­tridges), fu­ture cap­i­tal re­quire­ments (Face­book’s ini­tial pub­lic of­fer­ing was its last cap­i­tal rais­ing, but banks come back ev­ery few years), am­bi­tion, val­ues and much else. Les­son for the press: Not all founders are good for their com­pa­nies, nor are all pro­fes­sion­als. Les­son for In­fosys: Eval­u­ate your next CEO for a match with both the or­gan­i­sa­tion’s neeyat (mind) and zehneeyat (heart and val­ues). Les­son for the Tatas: Socrates once said a slave who has three masters is free. The Tatas will have to de­cide if they are a pub­lic mu­tual fund (that sells com­pa­nies with­out emo­tion), a pri­vate eq­uity fund (fo­cused on re­turns in a small port­fo­lio with ac­tive gov­er­nance) or a com­pany (run­ning op­er­a­tions), be­cause they can’t be all three.

In­dia’s sal­va­tion lies in job cre­ation by en­trepreneurs. Re­cent schaden­freude about In­fosys seemed to for­get that it still em­ploys 100,000 peo­ple and is worth ~2 lakh crore. Not all en­trepreneurs are dyslexic con­trol freaks (many founders we know would be hap­pier show­ing up for quar­terly board meet­ings and ques­tion­ing the CEO about profit af­ter tax last quar­ter rather than an­swer­ing the ques­tion). Most new gen­er­a­tion en­trepreneurs con­trol less than 25 per cent of their com­pa­nies be­cause they raise or earn their eq­uity rather than bor­row or steal it (the his­tor­i­cal av­er­age is above 50 per cent be­cause of ex­cess bank lever­age). Most im­por­tantly, be­ing a CEO is tough, but so is be­ing a founder, be­cause en­trepreneur­ship is not the solv­ing of a sum but the paint­ing of a pic­ture.

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