The Death of CEO Succession Planning as We Know It

Private equity (PE) has upended the AE industry since it arrived on the scene in earnest in 2016. It is rapidly becoming a preferred capital model for the industry’s largest firms. One-quarter of the ENR Top 100 designers now have PE in their capital stack—a six-fold increase over seven years. Four-in-ten deals today involve either a recapitalization by PE for a new industry platform (as of today there are 120 of these platforms and counting in the AE industry) or an acquisition by a PE-backed portfolio firm. This is up from two-in-ten just six years ago. Since 2016, the share of transactions involving PE has been increasing annually, while that of employee-owned acquirers has been declining at a similar pace. Simply put, PE continues to crowd out the industry’s traditional employee-owned model.

PE has been changing the industry in so many ways. More business jargon, less talk about multi-disciplinary capabilities. Fewer black turtlenecks and berets, more fleece vests. And the death of CEO succession planning. Wait, what? Yes, as PE assumes a greater role in the industry (and it will because for many leading employee-owned firms the question is not “if’ but “when” they will recapitalize with PE), the traditional approach to CEO succession planning will also be upended. In fact, it’s already pretty much DOA. 

  1. The Way We Were: Pre-2018, succession planning among the ENR Top 500 followed a well-traveled path that produced remarkably similar results. There’s a reason the average industry CEO (and there’s a 90% chance he’s a dude) has been with his firm 27 years. (For some perspective, that’s BEFORE the introduction of the Blackberry. For comparison’s sake, that’s 20 years longer than the average Fortune 500 CEO.) When most firms were employee-owned, tenure and “living the firm’s values” were the most prized characteristics when it came to choosing the “next CEO.” Sure, there was plenty of discussion about the necessity for “leadership and management” skills and having the next CEO be someone who was not only smart but had a high “EQ” and was respected by staff. And for these reasons firms sent their next CEOs off to exotic places like Cambridge, Massachusetts, to the Harvard Executive Leadership Program or the ACEC Senior Executives Institute, so they could “learn” about leadership and become more “self-aware.” Which they dutifully did. But, at the end of the day, the real deciding factor for CEO succession was one of trust. “Can we ‘trust’ him with our firm?” And that trust was born out of familiarity. And that familiarity came from tenure. And thus, the average industry CEO has spent most, if not all, of his career with the firm he now leads. He started as an intern, converted to a full-time designer, then made the leap to designer II, then project manager (which coincided with receiving his five-year “service pin”), then senior project manager, then VP for the office that was underperforming, and when he “turned that office around” became regional VP, then head of “important business unit” while also serving on the firm’s culture committee, then executive VP, and now CEO. Hiring CEOs from the outside was—and continues to be—a rarity for employee-owned firms (“How could we trust an outsider; he doesn’t know us or our values!?”) And that is the playbook that most employee-owned firms are still using today in anticipation of the next transition from Gen X CEO to Gen Z CEO. 
  2. The Replacements: (Great band. And a not-too-shabby Keanu Reeves/Gene Hackman gig.) In this brave new PE-infused world, “CEO succession planning” is still important, of course. Leadership and management skills—developed from within (see Mark’s excellent article below) and incorporated from the outside world (through other portfolio companies of the PE sponsor)—are valued highly. But tenure as a highly valued characteristic for the next CEO? Meh, not so much. PE seeks—nay, demands—superior performance than this industry has traditionally delivered. So, a whole new mindset is needed from the new CEO. And thus, the old model of succession planning is being thrown out faster than a buggy whip from the driver’s side window of a Model T in 1908. And in its place is the quest for bold, ambitious, business-savvy CEOs who can convert existing brands into fast-growth ones—quickly. Why quickly? Because PE typically has a five-year window of investment (in many cases in our industry it’s closer to three years) before selling the firm. These types of leaders are few and far between in our industry. And so, “succession” is being supplanted by ‘replacement.” A quick scan of the PE-backed firms in the industry shows that the average CEO tenure is just 8.5 years, with three-quarters of those having been hired from the outside. And not just from outside the firm, but also from outside the industry. The PE sponsor doesn’t necessarily care if the next CEO knows how to size a pipe or pick the correct color palette for a hospital foyer. They DO care about the ability to grow a top line and bottom line FAST, through organic and inorganic growth. So in that regard, non-industry, business-savvy executives are more likely to be the next CEO of the next employee-owned firm that recapitalizes rather than the 25-year veteran who has ticked all the “loyalty” boxes in his career with said firm. In our new PE-infused world, years of tenure doing the “right thing” for your firm are no longer a ticket to leadership.   

The era of CEO succession planning is coming to an end. No longer is there a “10-year” window to train and develop the next CEO. Instead, the era of CEO replacement action is here. The king is dead, long live the king.

To contact Mick Morrissey, you can email him at [email protected] or call/text on 508.380.1868. If you’re going to be in Houston later this week for our Texas and the South M&A and Business Symposium, drop him a line to set up a time to connect in person. 

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