Word on the Street: Issue 152

Succession

The theme of this week’s Word on the Street is “succession.” No, we won’t be providing commentary on the hit HBO show (although for the record, I’m team Shiv all the way). What we will be doing is hitting the topic of succession in the AE and environmental industry from a couple of different angles. In Preparing Your Firm’s “Next You” Mark Goodale offers advice on how to tee up candidates to step into your shoes.

I’m going to explore how and why CEO succession planning and execution tends to vary depending on a firm’s capitalization structure.

Starting point: At the vast majority of employee-owned firms, the unwritten assumption for CEO succession is that the top seat (or standing desk) 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 on a daily basis 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 leadership succession planning in employee-owned firms.

A closed system: Passing firm leadership to “the next generation” at employee-owned firms is a result of a number of psychological and organizational drivers. There’s a strong element of tribalism—we desire for “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, as we flagged in last October’s “Here’s Who’s Running the AE Industry—By the Numbers,” where (a) the average CEO tenure is 24 years (the longest being 55 years), (b) fully one-third of CEOs have been monogamous (if by monogamous you mean they’ve never worked at another firm), and (c) only 1 in 10 CEOs has a business degree. It’s not that employee-owned firms never recruit a CEO from outside—there are those that do. But it can be a fraught approach with the host rejecting the transplant more often than not. This failure rate increases when employee-owned firms seek to hire a Chief Operating Officer from the outside. An existential fear for many leadership teams and boards (history buffs: refer to senators) is that their magnanimous current internal CEO (Caesar) will be replaced by a tougher, not so genial operator (Octavian) 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.”

Powerful and limiting: This desire to transition leadership internally is the single-most important driver of the “leadership development” expense line item you see 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 abundant qualified candidates for leadership, most employee-owned firms focus their efforts exclusively on a chosen few from within.

A wider net: 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 (so as 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.

Capital drives strategy drives succession: 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 not surprising that the CEOs of close to 20% of the ENRTop 100 firms have either a business or law undergraduate or graduate degree.

The aftermarket for large firm executives: 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 since 2019 shows many of them were recruited to the firm either as part of the transaction or soon thereafter—to improve performance and drive growth. Indeed, one of the second-order effects of the increased presence of private equity in the 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 either a private equity firm or from an industry giant—it’s always a tell.)

Successful succession: There is no guarantee that your internal or external leadership transition strategy will work. There was a period in the early 2000s when a dozen or so ENR 500 firms paid a LOT of money for executive coaching and CEO succession planning that ended up in the ditch. From my perspective, the best approach to CEO succession planning is to keep in mind two things. The first is to make sure to consider internal AND external candidates. 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. The second is to prepare the entirety of your executive team and board for CEO succession. The success or failure of your next CEO will be determined not solely by her abilities and performance, but how the entire leadership team helps her be successful. And yes, this means if you have bad apples in your executive team barrel now—then clear them out either before or at the time of transition; they will only become more rotten as time goes on and compromise success. 

Team Roman, team Ken, or team Shiv? You can reach Mick Morrisey @ 508.380.1868 or [email protected].

Preparing Your Firm’s “Next You”

Who is the “next you” in your organization? You may not think it’s a question that opens up many possible futures, but it does. 

You’ve heard it a million times—identify your protégé early, then develop, develop, develop. The approach is so obvious it’s rarely if ever questioned (but it should be). For this approach to work, you need to make two assumptions:

1. You chose the right person to be your protégé.

2. You are equipped to develop this person to be your successor.

If you are right on both counts, good for you. Enjoy the rest of your day, and we’ll see you next week. For the rest of you mere mortals, here’s more to chew on…

Let’s start with the second assumption first. Since you are still reading, you are at least 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.

The first step in leadership transition is to start the process of continually improving yourself. If you aim to get better, your next-in-line will follow your lead. The best in any profession seek to improve every day, regardless of their past success. They create their own opportunities to do so. NBA legend Larry Bird was always at or near the top of the league in free-throw percentage. Why? Because he got his butt out on the court two hours before anyone else and tirelessly pumped in shot after shot, continuing to refine his muscle memory. He was like clockwork at the free-throw line, yet throughout his career he kept practicing his craft, looking for ways to refine his skills. While that investment certainly paid off for him personally with three NBA championships, an Olympic gold medal, and induction into the Basketball Hall of Fame, it had the residual effect of making his teammates better (which, by the way, made many, if not all, of those other accomplishments possible). At the height of his skills, he was one of the best players in the world, so when he put in the extra work to improve himself, it set the tone for the rest of his teammates. After all, what excuse could they have for not getting after it like he did?

Now let’s get back to that first assumption—you chose the right protégé to begin with. 

You get apples from apple trees. You are the apple tree, so don’t focus on just one apple. There’s a very good chance you’ll pick the wrong one. Open up the competition and see who shines. In some way 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 like:

1. 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?
2. Characterize the experience our clients have with us today. How do you intend to make it the best possible experience?
3. 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 may often be fueled by ungrounded assessments.

When people are challenged, you’d be surprised at how often the “wrong” person ends up being the right one. 

Mark Goodale is a trusted advisor and business coach to dozens of AE industry executives. He can be reached at [email protected].

Market Snapshot: Power and Energy (Part 2)

Weekly market intelligence data and insights for AE firm leaders.

Last week’s post featured overview, size, and outlook information about the power and energy market. If you missed it, you can check it out here. This week we will cover drivers, trends, and hot spots.

Drivers

• Economic and industrial activity
• Temperature and humidity patterns
• Energy use efficiencies
• Widespread electrification
• Government policies

Trends

• Power infrastructure projects will continue to face challenging regulatory and political environments across the country. State, local, and federal permitting processes—including environmental reviews—can be major bottlenecks for energy and power infrastructure projects. The issue has surfaced amid the recent debt-ceiling impasse in Washington.
• Climate-sustainability and resiliency-related markets are trending upwards. Many federal agencies have incorporated strategic goals that prioritize climate resilience and adaptation plans.
• Trending technologies like AI and quantum computing will require a lot of electricity in the future.
• Within the built environment, LEED registrations have been increasing. 
• Alternative sources of energy, such as nuclear, have been gaining ground. The U.S. Department of Energy (DOE) just awarded $22.1 million to 10 industry-led projects, including two aimed at expanding clean hydrogen production with nuclear energy and one focused on bringing a microreactor design closer to deployment.
• Energy transition M&A activity has been on the rise in areas like manufacturing, transportation, services, and technology. Investments involve artificial intelligence, machine learning, satellite IoT, cybersecurity, and many other solutions focused on improving efficiencies in many aspects of energy generation and distribution.

Hot Spots

• States showing growth in employment in energy sectors, particularly markets associated with clean energy initiatives.
• States where more energy comes from renewable sources including Washington, Oregon, and South Dakota. Alaska, Louisiana, and Delaware have the lowest levels of renewable energy use.
• States with reliable grids include Nebraska, South Dakota, and Illinois. Conversely, West Virginia, Vermont, and Maine rank low in terms of grid reliability.

To learn what’s ahead for power and energy and other AE markets, consider attending the Western States M&A, Strategy, and Innovation Symposium on June 7-9 in Las Vegas—The #1 business networking and education event for AE industry executives and investors interested in growing in the West.

Weekly M&A Round Up

Two deals in the West: Last week we reported two deals in the West along with six other domestic deals in GA, FL, NY, WI, and IL. We also reported one deal in the United Kingdom. You can check all the week’s M&A news here.