This is the last article of our four-part series examining the topic of CEO succession in the engineering and construction (E&C) industry and how to overcome the obstacles associated with new executive transitions. In the last article, we discussed how to facilitate the exiting CEO’s transition. Here, we explore how to determine if and when a successor will be ready to take over the helm of the business.
With 40% of new CEOs failing to meet expectations during the first 18 months of their careers, saying that passing the baton to a successor is a scary thought is an understatement. However, with CEO turnover at an all-time high, it’s likely that if you’re an engineering and construction (E&C) executive who has been at the helm for a decade or two, you are planning on retiring in the next few years. In fact, we estimate that 42% of companies in E&C will need a succession plan at the C-level in the next five years. And the risks are high—for the world’s largest companies, appointing the wrong leader can cost an average of $1.8 billion. For smaller businesses, it can make the difference between the continuity of the business, or the business coming to an end.
So how exactly can you tell whether your intended successor is ready to take the reins? Consider this: about 80% of CEO appointees have never served in a chief executive role before. For companies in the E&C industry, this may mean coming from a regional role as a VP, or even from a project manager role in some smaller companies. In those cases, their track record in their previous role isn’t a good predictor of success as a CEO.
If you’re about to retire, you’re probably asking yourself: how can I evaluate the readiness and ability of my successor to lead my company, in my company’s future context?
Step 1: Establish the kind of leader your company will need in the future
Every decision regarding succession should stem from your company’s vision and strategy. Ask yourself: where does my business need to go in 10-20 years? Once you’ve established that—whether it’s doubling your market share, embracing a new technology or opening an office on the other side of the country—you can start thinking about the competencies and skills needed to grow and lead this future business. Chances are your skills as a leader─the ones that allowed you to take your company where it is now─are at least somewhat different from the skills your future leader will need to drive the new strategy.
For example, take Rick, a CEO, who has a natural ability for networking, and an eye for opportunities to cut down costs. Through these skills, he has helped his firm become a key player in its region. Clients come to him because they get quality for a fraction of the cost, and his ability to build long-term relationships transformed most of his clients into loyal, returning customers. However, Rick knows that if he wants the company to keep growing and remain the low-cost provider his clients love, it has to become more innovative, perhaps embrace a new technology. This isn’t his natural strength, but his successors must be able to create a culture where creativity and calculated risk-taking are encouraged. They also must be able to lead the company through change. Rick’s vision for his company informs the choice of competencies (behaviors that will create exceptional performance in the role), and personality traits that will be essential for his successor.
While best practice would be to formally establish competencies and traits essential for the role through competency modeling, Rick can certainly come up with a short list. It will help him focus his readiness assessment on the right things. Since Rick has two candidates in mind, it will also help him compare apples to apples. Rick has deemed the following competencies essential to his successor’s success (the first three being very common for CEOs):
- Thinks strategically
- Builds Relationships
- Develops Talent
- Leads Change
Because Rick’s company is known for being a low-cost provider, he needs someone with high integrity and commitment to the company. He also needs confidence that his future leader will always do what’s needed to keep expenses low, including making personal sacrifices, and putting the company first. Finally, Rick must be sure that his successor has humility—preferably someone with self-awareness who does not hide his/her shortcomings, but instead learns from them.
As he uses multiple approaches to evaluate his candidates, Rick will keep track of his observations, organized by competency and personality trait. Any notes unrelated to these traits will be kept separately, to prevent irrelevant observations from influencing his judgment. This way, he will have tangible information for each one of those attributes, instead of just having an overall positive or negative view of the candidates.
Step 2: Get a 360-degree view of your successors’ competencies
Observe them in action. When successors are internal, there are unlimited opportunities to observe them. Stretch assignments are a safe way to evaluate readiness. Assign your successors with a real strategic initiative to move forward, and watch them in action. Choose the initiative carefully, so that it taps into the competencies that were deemed essential to drive the future strategy. Let’s use Rick as an example again with the future strategy that entails bringing in a new technology or delivery method. The initiative could be the responsibility for leading the research and idea generation phases, followed by the creation of a plan and the rollout. By coaching the candidates throughout the project, Rick will discover how they make strategic decisions, foster innovation, and build relationships internally, as well as externally with potential vendors of the new technology. Observing how the candidates establish their rollout plan will give Rick perspective on their ability to lead change, among other things.
Gather feedback from others. It’s as important to gain multiple perspectives as it is to use multiple lenses. Identify key stakeholders who can provide a different perspective on how your successor behaves when you’re not observing them. For example, guided by his list of competencies, Rick will meet with individuals who report to the candidates to understand how they develop talent. Does he spend time with his direct reports to discuss career goals? Does he frequently coach them, and offer support? Is he aware of their strengths and areas for development? He’ll also talk with their peers and clients to see how they’ve built relationships. Do they get to know them personally? Do they honor their commitments? Do they make themselves available to collaborate with others? Rick also works closely with his board of directors to gather their perspectives. External board members prove themselves invaluable when it comes to discussing how the successors stack up to what they’ve seen in similar companies. Through it all, Rick takes careful notes on the various competencies.
Step 3: Get to know your successors deeply to inspect their foundations
Without using any formal assessments, it is possible to better understand an individual’s foundation. In other words, do their personally traits help them or potentially derail them in their roles as leaders? You can discover these foundations by getting to know your successor deeply and asking the right questions. The more time you spend with your successor, the more you’ll understand what drives his or her behaviors.
In our example, Rick is now equipped with those essential traits he most wants to see in a successor, namely integrity, humility and commitment. Rick will schedule monthly one-on-one coaching meetings, where he coaches his successors on various issues they face and decisions they have to make. And in those interactions, he’s looking for clues about their character.
Good indicators of an individual’s foundation include:
- How they describe others: research has demonstrated that individuals who tend to speak negatively about others often do so from traits that can derail leaders, such as narcissism, depression, and antisocial behaviors. Describing others positively is linked to emotional stability.
- How they speak about their successes: If they tend to mention their achievements too frequently, this can be a sign of an overinflated view of themselves and a lack of humility. Evidence of not giving up to reach a goal—even in the face of difficulty—is a sign of commitment.
- How they attribute their shortcomings: If they take full responsibility for their failures and shortcomings, that’s a good indicator of integrity and humility. If they tend to blame others, it’s a red flag.
- Their reasoning behind tough decisions (personal or professional): What values are guiding their decisions? Are these values in line with those of the company? If not, then it’s unlikely that those prospects will lead the company in the intended direction.
Step 4: Determine Readiness
After several months of deep conversations with his potential successors, Rick should have a good idea of their readiness. He’ll have detailed notes on how they stack up on all the different essential traits to lead his company in the future. If the information gathered in several areas isn’t reassuring, he’ll know the successor isn’t ready. If Rick has good evidence of proficiency in all areas, this will indicate near-term readiness. It will also inform his decision to either hand over the company to one (or both!) candidates, identify gaps and continue their development, or start looking outside for a stronger successor.
With clarity around your vision for the company’s future, a short list of essential traits and competencies to lead successfully, and a deep, 360-degree knowledge of your potential successors, retiring leaders should be able to determine if, and when their successors will be ready to lead their company down the path of continuing success.