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SUCCESSION PLANNING IN TODAY’S MARKET ENVIRONMENT

Jun 15, 2020 | Joe Olson, ON Blogs

Vice President at ON Partners Joe Olson builds finance organizations for both high growth private technology companies and large, public consumer-facing brands.   

In this blog series, he examines modern day succession planning, how public companies can compete to keep their most talented people happy, and what private companies can learn from the traditional developmental experiences of Fortune 100 companies.


 

June 15, 2020 –  One of the results of the pandemic has been the significant G&A cuts that will have significant consequences on talent programs and how companies evaluate their internal capabilities for succession planning. It is absolutely critical that organizations take time to provide stretch opportunities, as 10-40% of the workforce is currently furloughed or unemployed, depending on the industry.

Nonetheless, we continue to witness a high level of wanderlust among executives who have grown up in more traditional, foundational training environments given the recent transaction velocity in the mid-market, primarily driven by PE. This becomes even more powerful when these executives have seen former colleagues move on to do great things as VPs and CXOs and create generational wealth in an accelerated period of time.

In this startup-driven culture, it can be easy to criticize large public companies for their pace. That said, it is important to recognize what they have traditionally done extremely well: create a very intentional approach to developing talent.

This is probably the biggest gap we see in many high growth technology companies. When you are dealing with most VC- or PE-backed organizations, the focus is naturally going to be geared toward optimizing the exit transaction.  As a result, particularly in PE, there is a trial by fire approach to professional development. In a larger public company, it is common to have different corporate finance roles serve as developmental platforms (i.e. treasury, IR, FP&A) so an executive can be rounded out as a potential CFO succession candidate.

 


How have traditional training grounds changed to keep up?

 

Decision curves have been drastically accelerated with technology. Businesses are used to dealing with a small handful of competitors, but now disruption can happen from almost any direction and the public markets/investors are affected by private companies that can significantly impact incumbent players.

Pension liability has resulted in a different mix of compensation levers. Pensions are still out there, but they are much more rare than in previous generations. Equity is still a powerful retention tool, but it can also have a dark cloud when the business is underperforming and options may be well underwater. This is especially important now, given COVID-19 and how much it has impacted hospitality, retail and other consumer-facing sectors. What used to be a retention vehicle is now almost an insurmountable burden – and a driver for executives to explore outside.

LinkedIn and other tools have allowed for more professional safety nets – we have a culture that rewards taking risks, and professional failure is fairly easily forgiven. In the past, you were limited by your personal network, and exposure was much more challenging – particularly since the startup ecosystem was so off the grid. This greatly emphasized the benefit of being in a tech hub like Silicon Valley: Your friends and neighbors were all connected to a similar ecosystem and could help. If you were in a more remote location, there was – and in some cases, still is – a gravitational pull to avoid family disruption and stay with one company.

The churn of the public markets has created the need for centralized shared services. This is advantageous for cost optimization, but it can also limit the level of exposure that G&A leaders will have in regional or BU leadership roles. As a result, when I am doing public CFO searches, it is very rare to come across a #2 who has fully checked all of the experience boxes across FP&A, accounting, tax, treasury, IR, etc. We are typically making a bet that (s)he can be surrounded by talent in areas of development.

Given those changes, how can public companies compete to keep their most talented people happy, and what can private companies learn from the traditional developmental experiences at training grounds like General Electric and Honeywell?

There is a common perspective that people do not quit companies; they leave their direct supervisor. This is still true but for high achievers, they also need to see a natural path that allows for developmental risk. How often does the organization hire from outside? When they do, are they emphasizing a technical skill set or are they trying to bring on “projectable” talent? It should also be noted that people will naturally view themselves in relation to former colleagues who have left the organization. This is human nature, but it is important to be aware that it will have an effect with different team members.

One of the challenges of both private equity and the recent quarter-to-quarter push in public companies is the natural focus on a short set of sprints vs. a longer development-focused marathon. For succession planning, it is important to understand what you are trying to solve. If you are hired to build a sustainable organization, you must understand the current team and how to prioritize technical vs. cultural capability within your direct reports.

For example, a CFO for a $1B public company may decide it makes sense to emphasize technical experience in treasury and in the controller, but can then make a bigger developmental bet on IR, FP&A, etc.

 


Deepening the bench

 

This is also a very specific opportunity to focus on diversity with someone who has the ability to grow into the role, but has not fully demonstrated that capability. In times where representation of diverse executives is a top discussion in boardrooms across the country (an area of significant focus at ON, and we are proud to have more than 200 diverse placements over the last two years), it is critical that CEOs and CFOs look to build their bench with a wide range of capabilities. This is a much larger discussion, but it does mean that we all need to evaluate the talent pools we typically explore in order to make sure we are not dismissing high quality candidates who may not have had the same exposure or opportunities as others.

It can also be very challenging when you set expectations of succession planning when you bring on talent. One of the reasons you see so many internal promotions at companies like Target, Best Busy, Advance Auto Parts and Home Depot is that the “external promotion” opens up significant risk of your high value employees leaving the organization. Also, bringing a public CFO from a similar role is extremely challenging given than it involves a significant financial commitment that can cost 5x or more vs. promoting an internal candidate.

To truly create a culture of internal progression, that has to be reinforced by the CEO and the board of directors – it means taking risks and being comfortable with the known vs. the optimism that sometimes comes with the unknown.

 


Promoting from within

 

I recently read Bob Iger’s book A Ride of a Lifetime, in which he talked about his own promotion to the CEO of Disney. (It’s a great read, but I hope he adds a few chapters after going through the crisis of our time with COVID-19). It can be extremely challenging to “promote change from within” given that internal candidates would have had a significant hand in the decisions that would drive the need for a new leader. That said, it can be done if the internal candidate can self-assess and evaluate how they would change going forward. Bob is obviously one of the sharpest CEOs of his generation, but he could have easily been passed over if not for a number of board members taking a bet on him.

Selfishly, as an executive recruiter, succession planning can sometimes cost me significant fees and great search opportunities.

That said, I firmly believe there are people who are phenomenally talented who struggle with their own self-promotion. They may not grow to be CEOs of F500 companies, but they need exposure to broader challenges in order to make a bigger leap in the future – particularly for diverse candidates.

We all need to self-assess what we can do in order to influence change and I wish it were as easy as writing a post or amplifying someone else’s voice. At ON Partners, we are committed to listening, learning and meeting with both the current and next generation of diverse leaders.

 

Vice President at ON Partners Joe Olson builds modern finance organizations for both high growth private technology companies and large, public consumer-facing brands.  For more insights from Olson, view his previous blog on finding the right CFO for the organization.

 

 


 

ABOUT ON PARTNERS

 

ON Partners propels an organization’s mission by building C-level and board leadership teams. Founded in 2006 by like-minded consultants as a values-driven alternative to the multi-service global firms they were leaving behind, ON delivers a better executive search experience. Named by Forbes as one of America’s Best Executive Recruiting Firms and to the Inc. 500/5000 Lists six times, the firm is consistently ranked among the top 20 retained executive search firms in the U.S.

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