Stepping into the Founder’s Shoes: Evaluating Your Internal Leadership Options

December 18, 2024 – CEO succession is crucial because it ensures leadership continuity, aligns the organization’s vision with its future goals, and minimizes disruption during transitions, safeguarding the company’s long-term success. When it comes to founder succession, the stakes are especially high, according to a recent report from leadership advisory firm Egon Zehnder’s Anna Auerbach. So often, the founder embodies the vision, culture, and strategic direction of the company which makes replacing them a weighty and complicated endeavor, the study explains.

“While many founder-led companies do conduct outside searches for new leaders, they often want to prioritize grooming their internal talent—as potential successors who really know the company and can more seamlessly pick up the founder’s mantle,” the Egon Zehnder report said.

Frequently a founder has hand-picked a colleague as his/her anointed replacement. “Whatever the case, the choices of internal candidates always come with unique profiles, complete with both advantages and challenges that must be carefully weighed against the leadership mandate,” said the Egon Zehnder report. “The best selections are usually not abundantly clear until after a thorough, and sometimes extended, evaluation process.”

Understanding the Context

Before diving into the evaluation of internals, Egon Zehnder notes that it is most essential to understand the context in which the succession is taking place. Factors such as the company’s current market position, growth trajectory, and organizational culture contribute significantly towards shaping the criteria for a suitable successor.

Moreover, the founder’s current situation is always a big consideration: Is the succession just standard long-term business planning? Are they ready to move on now? Is this actually not a voluntary changing of the guard? “Above all, it is the company’s evolving vision and long-term strategic goals that set the objectives for the succession and have the most profound effect on the selection of candidates as well as the ensuing evaluation processes,” the report said.

Egon Zehnder points to these key advantages of internal candidates:

• Cultural fit: Internal candidates are already familiar with the company’s culture, values, and operational dynamics. This familiarity can facilitate a smoother transition and ensure continuity.
• Institutional knowledge: Internal candidates possess a deep understanding of the company’s history, processes, and key stakeholders. This knowledge can be invaluable in maintaining stability during the transition period, and it can also steady and support the candidate as they make their way up the learning curve to expand their leadership capacity as potential CEOs.
• Employee morale: Promoting from within can boost employee morale and signal to the workforce that the company values and rewards loyalty and performance.

However, Egon Zehnder notes that there are common challenges of internal candidates such as bias and preconceptions. “Internal candidates may come with preconceived notions and biases that could hinder innovation and change,” the report said. “They may have a set perspective based on the founder’s vision, yet what the company may benefit most from is a fresh point of view. Similarly, the rest of the executive team likely has a bias (positive or negative) to any internal. Positively, this can increase followership; but in the negative it can cause frustration from others and a feeling that the internal is only a pale shadow of the founder.”

When to Start the CEO Succession Planning Process

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Another challenge Egon Zehnder points to is the lack of outside expertise and experiences. “Unlike external candidates, internal candidates may lack a fresh perspective that can be crucial for steering the company in a new direction,” the search firm said. “Often these candidates have grown up with the Founder – they were drawn in by the mission or vision. And if this role has been their most formative role, they may also lack a breadth of experience that outsiders often have. For example, an internal candidate could lack the broaden viewpoints that come from working at a partner firm or “adjacencies.” If the internal candidate’s experience is too limited, their purview could be too, and they may may find it particularly challenging to deviate from a founder’s vision and strategy.”

Related: How to Develop Effective Leadership Succession Planning

Lastly, Egon Zehnder says that the potential for internal conflict can be a challenge for internal candidates. “The promotion of an internal candidate can sometimes lead to internal conflict, especially if there are multiple contenders for the role,” the report said. “Careful team planning and transparency are the best means for avoiding negative consequences from this.”

Special Considerations for Evaluation

Beyond being generally thoughtful in evaluating an internal in parallel with outside candidates, Egon Zehnder notes that there are some special considerations and steps that should be taken:

• Distinctive leadership: Since internals are following in the founder’s footsteps, it is important to ask, does this candidate have a distinct persona? Often, Egon Zehnder finds the internals pride themselves on being a founder’s right hand. But we need to learn who they are in their own right. What is their unique vision and strategy? “It’s important to see what this candidate would do differently–it’s a positive to hear their constructive critique of the business status quo,” the report said. “The most impactful leaders ultimately move beyond founder mentorship and implement their own creative, growth-oriented visions developed expressly for their moment at the helm.”
• Positioning with internal teams: It is important to get a team view of the internal, but also to review that feedback with the right filter and lens, according to the Egon Zehnder report. “An internal candidate will need a high bar of respect and credibility to step into the CEO role,” it said. “It may make sense to do deep referencing internally to better understand this view.”
• Explicit leadership development: Many internal candidates may view succeeding the incumbent CEO as natural, but this will inevitably be a step change in their development. If they were leaving to go to an outside CEO role, they would likely make a deliberate effort to develop and prepare themselves, so how can we do this with an internal succession? “This is a time where investing in outside development program can be extremely valuable, so the candidate has time to set a deliberate intention to work deeply on their potential growth into and identity as a CEO leader,” Egon Zehnder said. “A candidate’s willingness to take this on can be a great indication of their curiosity and a growth mindset, both of which are now such critical elements of strong and effective leadership.”
• Incorporating promising “outside” thought leadership: The internal candidate’s strength is obviously her/his organizational knowledge, but those who will make the best leaders also demonstrate the ability to make sense and use of the most promising perspectives percolating from the external market. Egon Zehnder notes that this is a critical piece to probe in interviews—to ask how they stay fresh on the industry? Where do they get ideas? Who is on their personal board of advisors and mentors? It is also a consideration for the search committee if an internal CEO needs to backfill their role with an another internal or augment the leadership team with external hires to bring in expanded expertise.

“Founder succession is one of the most pivotal undertakings which companies go through,” the Egon Zehnder report said. “It is never easy to replace the individual who founded, nourished and grew the company, even if it is time. Board members need to be able to find the best successor who can both harness the founder’s legacy and the one who can embody a new leadership identity fit for the organization’s future. Sorting through the internal talent to find this best potential new leader is no easy task—it is a nuanced, delicate, complicated process of evaluation. Often the answer is not clear cut and will involve weighing different objectives and risks against each other, until the optimal choice becomes clearer.”

In the end, generating a thoughtful, in-depth view of the internal choices, deciding on a successor accordingly, and ensuring they have what they need to succeed is a critical investment in a company’s growth and success for the post-founder age.

Related: Creating an Impactful Succession Plan

Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor  – Hunt Scanlon Media