1896 family photo -Texas by oldmantravels.

Rod Schwartz from ClearlySo started up a great conversation on SocialEdge about a week ago.   The conversation revolves around the double-edged phenomenon of charismatic social entrepreneurs (here for Max Weber’s definition of charismatic authority).  In addition to providing great commentary himself, Rod references a series of fantastic blog posts from Jessica Shortall on the topic of succession in social enterprises, which I found particularly compelling.

Here are some highlights:

The transition from entrepreneur to second-generation leadership is fraught with difficulty in any sector. Charismatic, passionate entrepreneurs are by their very nature difficult to replace overnight. They usually have a few things going in this respect:

  • Deep knowledge of the organisation and its networks
  • Loyalty from and personal ties to staff and stakeholders
  • Credibility (sometimes even awe) from all those years of hard slog in the start-up phase

However, across the board, it’s often true that the entrepreneur type is not the right (wo)man for the job in the later growth and maturity phases of the venture – this is a CEO’s job, and requires a different skill set.

The first few sentences here remind me of research I did several years ago on the relationship between socio-cultural norms and economic development.  The research at the time commonly cited China as evidence that cultures emphasizing strong intra-familial ties and values (i.e., Confucianism) tend to develop more slowly in economic terms.

Part of the reason, according to this theory, is that strong intra-familial ties are associated with lower levels of trust in individuals outside one’s family.  This increases transaction costs in general business dealings and, from an entpreneurship standpoint, makes successful founders less likely to pass on their growing businesses to professional management outside the family.  The result is an inability to scale over the generations.  Companies start to get big then fizzle out as less adept family members take over the business.

In fact, there is some evidence that China has traditionally struggled with this.  I challenge you, for example, to list three major global brands that are based in China.  It’s not easy, despite the fact that China has the fastest-growing economy in the world.

They also have an expression in China that, thought it varies from region to region, goes something like this:  “Rags to rags in three generations.”  The idea, again, is that the founder builds the company from scratch and hands it over to the son, who grew up working his tail off in the family business.  The third generation, however, raised in the lap of luxury, develops an interest in more leisurely pursuits and/or lacks the skills needed to continue building the enterprise.  Without a logical successor within the family, the company dies.

It’s a fascinating concept.  And guess what… an almost identical expression has long-existed in the English language.  “Shirt sleeves to shirt sleeves” or “Clogs to clogs in three generations.”  The proverb is so ubiquitous in the West, in fact, that we can only conclude that this has been a universal problem within budding industries and societies.  Wrestling a successful enterprise from the clutches of its founder is no easy task.

So what to do about it?

Well, for one, we need to acknowledge that that entrepreneurs play a critical role and can be, under the right circumstances, good CEOs.  Marc Andreesen, former founder of Netscape, confirms this in his outline for the vision of his new VC firm:

Above all else, we are looking for the brilliant and motivated entrepreneur or entrepreneurial team with a clear vision of what they want to build and how they will create or attack a big market. We cannot substitute for entrepreneurial vision and drive, but we can help such entrepreneurs build great companies around their ideas.

We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but most of the great companies in our industry were run by a founder for a long period of time, often decades, and we believe that pattern will continue. We cannot guarantee that a founder can be a great CEO, but we can help that founder develop the skills necessary to reach his or her full CEO potential.

Ok, now what?  We need to learn from companies who have solved this problem.  The ClearlySo blog posts mentioned earlier have some ideas.  Here are a few more:

  1. Institutionalize leadership development and succession planning programs early on. This can and should be driven by a Board of Directors in order to set the expectation that leadership of the organization will transition and to start to prepare individuals for those roles.
  2. Give the founders something else to do. I don’t mean this disparagingly. Certainly, entrepreneurs are some times dedicated to a single idea, which makes moving on incredibly difficult.  But just as often they are motivated by a general desire to impact the world around them and explore and implement revolutionary ideas.  If board members and investors can nurture these ideas, they can better leverage a founder’s native skills and help her weather the identity crisis that will accompany handing over the reins.
  3. Set a date for transition several years in advance. It sounds arbitrary but, like a couple thinking about having their first baby, we need to recognize that there will never be a perfect time.

Regardless of how you make it work, just be sure to never lose sight of how critical this issue is.  If we want social enterprises to succeed, this is yet another nut we’ll have to crack.