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].