By Katy Holmgren

Founder CEOs have long had a reputation for being difficult. Conventional wisdom tells us that they resent suggestions from their boards, and they care more about their own ideas than the bottom line.

But new research by Carlson School professors suggests that this reputation is undeserved. “As the conventional wisdom has it, founder CEOs cause more problems, but that isn’t what we found,” says Harry Sapienza, professor of strategic management and organization. The researchers presented their findings in June 2005 at the Babson-Kauffman Entrepreneurship Research Conference, which annually attracts scholars from around the world.

CEO situations

Sapienza worked with Daniel Forbes, assistant professor of strategic management and organization, and with M. Audrey Korsgaard, professor of management at the University of South Carolina. Together, they studied the differences between founder CEOs and CEOs who had been hired by boards. “The founder CEO and the nonfounder are different animals,” says Sapienza. “They behave differently in situations and encounter different outcomes.

“The founder CEO may be willing to do or give things that others would not,” says Sapienza, pointing out that the founder CEO has an emotional tie to his or her company. This bond had long led people to guess that founder CEOs and boards exist in a state of constant conflict and mistrust. In fact, founder CEOs had slightly less conflict with their boards than board-hired CEOs did. “Our interpretation is that when things are going well, founder CEOs are more likely to be trusting,” says Sapienza.

But when times are hard, founder CEOs can run into slightly more conflict with their boards than hired CEOs do. Sapienza and Forbes suggest that this may be because founders feel distanced from the board and personally blamed for the venture’s results. Hired CEOs have more moderate and stable levels of conflict with the board throughout good times and bad.

But when times are hard, founder CEOs can run into slightly more conflict with their boards than hired CEOs do. Sapienza and Forbes credit this to a founder CEO’s feeling that boards can mismanage the venture, thereby causing the low valuation. Hired CEOs had more constant levels of conflict with the board throughout good times and bad.

Conflict categories

Their research also indicated that boards can become increasingly less effective at problem solving when times are difficult. The major reasons for this are distrust and disengagement.

Each board member has individual goals, concerns, and degrees of investment. A seed-stage investor might feel that a new investor has diluted the share of the eventual profits.

A founder CEO might worry that board members seek only short-term profits, and don’t share the goal of a company that’s successful in the long run.

All of these issues can emerge when times are hard, leading to increases in relationship conflict. And that makes it harder to recover in times of economic hardship. This leads to a quagmire of mistrust and resentment that can pull a board in many different directions.

In order to examine this phenomenon, Sapienza and Forbes separate conflict into two categories: task and relationship conflict. Task conflict occurs when people have differences of opinion about the tasks they are performing. Some task conflict is generally considered healthy on a board, because it shows that the board is engaged in a critical consideration of the relevant issues.

But increased levels of task conflict can raise the risk that board members will experience relationship conflict, which is characterized by a tendency to focus on the people rather than the issues and by the experience of negative emotions, including tension and annoyance. These things are detrimental to effective board performance.

“People react to situations and can misread task conflict as relationship conflict,” says Sapienza, who holds the Curtis L. Carlson Chair in Entrepreneurial Studies. “They fear others don’t have their best interests at heart.”

Relationship conflict can mean that people don’t speak to each other or simply don’t listen to each other—which makes it almost impossible for the best ideas to be discussed and agreed upon.

The impact of down rounds

Forbes and Sapienza’s findings arise from research done in the wake of the dot-com crash of 2000. Throughout the 1990s, many entrepreneurs had received the backing of venture capitalists, and the companies were rising in value—at least on paper. In 2000, the dot.com boom turned into a bomb and companies with valuations that had had risen considerably then fell sharply.

The drop in value meant that many venture-backed companies who received financing in 2002 did so at a lower venture valuation than previously, thereby experiencing what is known in the industry as a “down round.” In a down round, no individual is to blame for the low valuation, which makes the down round environment a perfect research lab for examining the different ways people interact in stressful situations.

Forbes and Sapienza found that roughly 50 percent of the firms completing a round of financing in 2002 experienced a down round and that the figure for IT companies was even higher. “Assuming that the market is performing normally, a down round means that a company is in trouble,” says Forbes.

However, the drop in value after the dot bomb wasn’t directly attributable to any stakeholder in the company. As Forbes and Sapienza discovered, that didn’t stop blame from being tossed around. Says Sapienza, “People pointed fingers.”

The boards of venture-backed companies studied by Forbes and Sapienza range from small—three people—to large—seven people. The boards typically consist of a CEO, the chief investors, and perhaps an industry expert. The larger boards may also include a COO or other high-level employee of the ventures.

Solutions to increased conflict

Neither Forbes nor Sapienza has done direct research on how to solve the problem of increased conflict in troubled times. Even so, they both suggest the same solution to increased relationship conflict: don’t let it happen in the first place. Forbes says, “When conflict arises, you need to have a process that everyone already buys into.”

Procedural justice may be the answer. If the interactions between board members are governed by rules that everyone agrees to, it’s harder for the constituents to feel that they are being sidelined.

These rules need to be in place before task conflict threatens to become relationship conflict. Although seemingly simple, such rules can help boards and CEOs avoid the events that can result in hurt feelings.

For example, a rule that states that every board member who moves to speak at a meeting must be heard can create at least the appearance of a fair hearing.

“You can’t ensure that everyone gets heard with respect, but you can make sure that there are at least no interruptions,” says Sapienza. “There might be a difference between the letter and the spirit of the law, but you can promote the underlying principles.”