Much more than solving a sum

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

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.
 

Illustration: Binay Sinha

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 Rs 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.  The writers are first generation entrepreneurs growing their second company, Teamlease Services