Whether readying for retirement in the short term or planning for their companies’ viability in the long term, CEOs of architecture, engineering, and environmental consulting firms have too much at risk to fail to prepare for the future adequately — and that includes finding and developing their replacements.
A smooth CEO succession is critical to the sustained success of any AEC industry firm. So, who’s the “next you” to lead your architecture, engineering, or environmental consulting firm into the future? The answer to that question tends to vary depending on an AEC industry firm’s capitalization structure.
Employee-Owned Firms Favor a Closed System
At the vast majority of employee-owned firms, the unwritten assumption for CEO transition is that the top seat will pass internally to a current manager or employee. If the CEO is five to ten years away from retirement, there’s hopefully one or two internal management candidates whose strengths and flaws are known and who are being “developed.”
If the CEO has a longer-than-a-decade runway, then there’s a general sense of optimism that there’s a cohort of “next-gen” leaders who are daily acquiring the skills and building the goodwill needed to be the next firm leader. For something that is not required by law or corporate statute, this unwritten assumption is at once the most powerful and limiting bias of CEO succession planning in employee-owned firms.
Passing firm leadership to “the next generation” at employee-owned firms results from several psychological and organizational drivers. There’s a strong element of tribalism — we desire “one of us” to lead us. This driver sees institutional knowledge (the next CEO needs to “really know us and our culture”), loyalty (in the form of tenure), and subject matter expertise of the firm’s core competencies (usually flagged with a professional registration of degree) as the primary three qualifications for the top job.
The result is an industry in which inside ENR Top 500 Design Firms (a) the average CEO tenure is 24 years, (b) fully one-third of CEOs have never worked at another firm, and (c) only 1 in 10 CEOs have a business degree.
It’s not that employee-owned firms never recruit a CEO from outside — some do. But it can be a fraught approach, with the host rejecting the transplant more often than not.
An existential fear for many leadership teams and boards is that their magnanimous current internal CEO will be replaced by a tougher, not-so-genial operator from the outside. Most of the time for this position, circumstances (internal politics, individual agendas, executive team dysfunction, unrealistic expectations) conspire to result, in the words of Elon Musk, in “a rapid unscheduled disassembly.”
This desire to transition leadership internally is the single-most important driver of the “leadership development” expense line item on firms’ income statements. Employee-owned firms that are serious about securing their futures invest copious resources (dollars, leadership/management time, emotion) into vetting, finding, and developing their next leaders.
And while that investment often incorporates expertise from outside sources (consultants, universities, peer groups), the effort is 100% directed at a discrete number of internal candidates. And this is the limiting factor of this approach. In a wide world/industry of abundantly qualified candidates for leadership, most employee-owned firms focus their efforts exclusively on a chosen few from within.
Publicly Traded Firms Cast Wider Nets
Publicly traded firms (with a functioning board of directors) and those that are capitalized by either a family office or private equity tend to have a much different philosophy when it comes to CEO — and in general C-suite — succession planning and execution. For these firms, the agreed-upon strategic business plan and vision are the primary drivers for decision-making about who will take over the top job in the future.
These firms — by virtue of their capital model — all have a vision for growth (to increase the value of their equity to meet their investors’ requirements). For many firms with a private equity partner, the vision is to at least double in size over five years. For publicly traded firms and those with family office partners, the growth trajectories can be less aggressive but still demanding.
For this cohort of firms, their succession planning is based on having a high degree of confidence in a CEO who can achieve their stated growth goals. This means searching for an executive who has “been there, done that.”
These firms primarily value experience and ability, and place less — if any — value on tenure with the firm. The plan is 100% focused on the future, 0% on looking back. All about what’s next, much less about where the firm has come from. They look first for business acumen and leadership qualities. So, it’s unsurprising that the CEOs of nearly 20% of the ENR Top 100 Design Firms have either a business or law undergraduate or graduate degree.
Particularly for firms with private equity partners, CEO succession is all about recruiting a seasoned, experienced executive quickly from outside rather than developing one slowly from the inside. A quick scan of the CEOs of the 50-plus ENR 500 firms that have been recapitalized by private equity or a family office between 2019 and 2023 shows many of them were recruited to the firm either as part of the transaction or soon after that — to improve performance and drive growth.
Indeed, one of the second-order effects of the increased presence of private equity in the AEC industry has been the new lease on life experienced by many former executives of the industry’s largest firms. (Hint: If you want to know if a competitor or peer has been recapitalized, keep an eye out for news about new CEOs or new board members coming from a private equity firm or an industry giant — it’s always a tell.)
Four Keys to Successful CEO Transitions
You’ve heard the typical leadership development advice a million times — identify your protégé early and then develop, develop, develop. The approach is so obvious it’s rarely if ever, questioned — but it should be. The best approach to CEO succession planning is to follow these four steps:
1. Consider internal AND external candidates.
CEO succession, like everything else, is subject to probabilities. Your firm will have a better chance of a successful outcome if you define the criteria for your next leader and source from the largest pool of qualified candidates. Open up the competition and see who shines.
2. Prepare the entirety of your executive team and board.
The success or failure of your next CEO will be determined not solely by that person’s abilities and performance but by how the entire leadership team helps that person be successful. And yes, this means if you have bad apples in your executive team barrel now — then clear them out before or at the time of a CEO transition; they will only become more rotten as time goes on and compromise success.
3. Start the process of continually improving yourself.
You are equipped to develop your successor if you are open to the possibility that you could improve something about yourself — how to give feedback, make personnel decisions, deal with conflict, create new business opportunities, build a team, inspire performance, handle moods (yours and those of others), listen, react to criticism, encourage new ideas, and so on. If you aim to get better, your next-in-line will follow your lead. The best in any profession seek to improve daily, regardless of their past success. They create their own opportunities to do so.
4. Make the correct choice.
When developing internal candidates, you need to tap into what future your people see they could have. Lots of people can’t see their own opportunities. They look at the world through their current position and only see that position in their future. Dig into that by asking them to reflect on questions such as:
- What is your assessment of your own experience in your company?
- What change do you intend to make within yourself to transform that experience into a much better one?
- Characterize the experience our clients have with us today. How do you intend to make it the best possible experience?
- How is our company faring overall?
- How do you intend to improve its performance?
Then put opportunities in front of them and identify your next protégé based on your subsequent observations rather than basing your decision on hunches, which ungrounded assessments may often fuel. When people are challenged, you’d be surprised at how often the “wrong” person ends up being the right one.
Partner with Morrissey Goodale for a Successful CEO Succession in Your AEC Firm
Morrissey Goodale Can Help Your AEC Firm Execute a Successful CEO Succession Morrissey Goodale’s ownership transition experts can help your architecture, engineering, or environmental consulting firm execute a smooth internal or external CEO transition.
Through one-on-one executive coaching and on-site programs, our management experts can put our decades of deep AEC industry experience to work to improve the leadership skills of your rising stars and instill in them an ownership mentality to ensure the long-term viability of your firm. In addition, Morrissey Goodale’s certified AE business valuation experts and financial consultants can establish succession plans that ensure your firm’s continued prosperity and develop internal ownership transition plans that maximize any owner’s return on investment.
Contact us today to learn how Morrissey Goodale can help your AEC firm through CEO succession.
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