When a founder starts a business, three roles are usually wrapped into one person. They own the shares. They are a legal director of the company. And they run the business.
At that stage, there is little practical reason to distinguish between them. The founder makes the decisions, carries the responsibility and lives with the consequences.
As the business grows, that changes. The founder still wears all three hats, but the hats begin to represent different responsibilities, different questions and, importantly, different ways of speaking.
I describe the hats as:
- Shareholder
- Legal Director
- Executive Leader
Understanding which hat you are wearing can improve the quality of decisions. Just as importantly, it can improve the tone of conversations inside the business.
At the beginning, the hats are indivisible
In a very small recruitment agency, the distinctions are largely academic.
The founder may decide how much money to take from the business, approve a new system, deal with a compliance issue, win a client and recruit the next employee. All in the same day. They are simultaneously owner, director and executive.
That works because there are very few other people whose authority needs to be considered.
Once the business begins to grow beyond that very small stage, the distinction becomes much more important.
There are managers. There are employees with responsibilities. Decisions are being delegated. People need to understand who has authority and where that authority comes from.
At this point, continuing to behave as though every decision is simply an owner’s decision can become counterproductive.
Three hats ask different questions
The easiest way to recognise the distinction is through the questions each role asks.
The Shareholder asks “What do I want from my ownership?”
That may involve income, dividends, capital growth, risk, liquidity, reinvestment, eventual sale, family wealth or the amount of personal capital that should remain invested in the company. These are legitimate questions.
The Legal Director asks: What are my obligations as a director?
That includes obligations to the company, but also the wider responsibilities that come with operating it: solvency, tax, financial stewardship, employment obligations, regulation, compliance and appropriate oversight of risk.
The Executive Leader asks: “What is the right decision for the business, and who should make it?”
This is the operating world: clients, staff, strategy, performance, investment, priorities, structure and execution.
These questions can produce different perspectives on exactly the same issue.
Consider a decision about retaining profit in the company. The shareholder may want a dividend. The director may believe the balance sheet needs greater protection. The executive may want to invest the funds in another senior hire. None of those positions is necessarily wrong. The important first step is knowing which conversation is taking place.
The shareholder voice changes the room
For a founder in a growing business, the Executive Leader hat should dominate everyday work.
I sometimes describe the mix, somewhat simplistically, as 95% Executive Leader, 5% Legal Director and effectively no Shareholder voice while operating inside the business.
The shareholder has not disappeared. The ownership rights remain exactly where they were. But invoking ownership inside an executive conversation has consequences.
There is a substantial difference between saying: “We have considered the alternatives and this is the decision I have made as Managing Director.” and saying “I own the business and this is how it is going to be.”
The eventual decision may be identical. The effect on the organisation is not. Once ownership is invoked, the nature of the conversation changes. Other executives know that they are no longer discussing the issue simply on its commercial merits. Authority has moved from the executive role to the ultimate power of ownership.
People become less willing to challenge. A manager who thought they held delegated authority may discover that the authority exists only while the founder agrees with them. Other employees notice. Over time, people learn where the real decisions are made and adjust their behaviour accordingly.
The danger is not necessarily that the founder makes the wrong decision. The danger is what happens to the room when ownership enters the conversation. Trust can be weakened without anybody openly objecting.
The founder’s executive role changes
As the organisation continues to grow, the three hats remain but the balance changes again.
The founder’s Executive Leader role should itself evolve. At perhaps six or ten people, the founder is usually directly involved in clients, recruitment, staff decisions and much of the daily operation.
At twenty, fifty or one hundred people the founder moves from personally doing, to managing, to leading managers and eventually to leading leaders. More decisions occur without them, and more authority has to sit elsewhere.
At the same time, the Legal Director role becomes more substantial. The organisation has more employees, more financial commitments, greater regulatory exposure, more complex contracts, larger payrolls and potentially more shareholders. Governance can no longer be something dealt with informally when necessary. The director hat deserves its own attention.
Again, the language matters.
A founder questioning an executive because the founder personally dislikes a decision is not the same as a director asking whether management has properly considered a material risk.
One is potentially executive interference. The other may be entirely appropriate governance. Knowing which hat is being worn makes the distinction much clearer.
Then the shareholder re-emerges
Something interesting happens as businesses become larger and more valuable. The shareholder role becomes important again. Not necessarily inside the operating company. In fact, by this stage it may be even more important that employees rarely hear the founder relying upon ownership as organisational authority.
But outside the day-to-day business, the shareholder questions become much larger. For a substantial business, these discussions can lead to investment structures, family trusts, family offices and significant assets completely separate from the operating company. This is the shareholder hat doing legitimate shareholder work.
The founder may therefore reach the apparently contradictory position where ownership becomes more important personally while becoming less visible operationally. That is a healthy development.
Different hats belong in different rooms
The three hats do not require three different people. Nor does every business require elaborate governance structures to separate them.
The discipline can begin simply by being conscious of the role. Before entering a discussion, ask: Which hat am I wearing?
Before answering an important question: From which role am I answering?
And when several issues have become mixed together: Are we having a shareholder conversation, a director conversation or an executive conversation?
Sometimes the correct answer is to stop the discussion and move it to another forum. A question about shareholder distributions may belong in a shareholder meeting rather than an executive meeting. A director’s concern about solvency or compliance may need to be dealt with formally rather than folded into an operational budget discussion.
An executive decision should normally remain an executive decision, even when the founder happens to own all the shares. The point is not bureaucracy. It is clarity.
Avoid the Founders Club
For simplicity we usually write about a single founder, but many recruitment agencies have multiple founders. This creates another potential challenge.
These founders have taken the risk, made the sacrifices to get the business going, and are all-in on its success. But as the company grows and responsibilities are delegated, care needs to be taken.
If the executive team is seen by the staff as “founders only”, and all decisions are made by the authority of the founders group, then emerging leaders see a barrier – a club that they can never join. Capable people can disengage or leave for environments where they see greater opportunity.
The founders, as a group, need to be especially careful not to use shareholder authority in executive situations.
Ownership should not have to be announced
A founder does not stop being the owner because they choose not to invoke ownership. Quite the opposite. The more authority a founder has, the less frequently they should need to remind people of it.
As a company grows, leadership increasingly depends upon other capable people being willing to make decisions, take responsibility, disagree constructively and trust the authority they have been given.
A founder who continually reaches for the shareholder hat can unintentionally undermine all those things. The three hats therefore provide a simple discipline:
- The shareholder asks what they want from ownership.
- The legal director asks what obligations they must fulfil.
- The executive leader asks what the business needs and who should make the decision.
At the beginning of the founder’s journey those questions may all be answered by one person in one conversation.
As the business grows, learning to separate them becomes part of the founder’s job.
This article is part of HHMC’s Appropriately Corporate series for staffing and recruitment business owners, exploring growth, leadership, valuation and transaction readiness. If these issues are relevant to your business, we would be pleased to continue the conversation.
