Succession: Inside or Outside?

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WAYNE RIVERS: Hi, everyone. This is Wayne Rivers at Performance Construction Advisors where We Build Better Contractors.

This week I want to talk about succession. Inside or outside? Inside succession or outside succession. This comes from the daily CEO briefing that I take. If you take it too, you won't have any need to look at the blogs anymore. I use it so often.

This is a strong article. But first, before I get to that, let me read you something from Elon Musk. And this was on X, which he obviously owns. He's talking about building world-class teams. Now, I don't know what you think of Elon Musk. I don't care. It doesn't matter. By any measure of the imagination, this guy has been successful in business, right? Whether it's X or The Boring Company or the rocket company, the guy has been pretty darn amazing. In fact, he's the richest man in the history of the world. So in business anyway, he might be a jerk in real life. I don't know. Don't care. But in business anyway, he's accomplished quite a bit.

Okay. His philosophy on putting together world-class teams. If somebody gets things done, I love them. It's pretty straightforward. He hires for four core traits, talent, drive, trustworthiness, and goodness of heart. He says he under-weighted goodness of heart at one point. Are they a good person, trustworthy, smart, talented, and hardworking? If yes, you can teach them domain knowledge later. But those fundamental traits, you cannot change. I think that's profound. It's so simple, and yet I think so powerful. So email me, [email protected]. Tell me what you think of that philosophy. What you think. Whatever you want to tell me, go ahead. It's okay. I can take it.

Okay. So now, when you're thinking about succession, last week we talked about the importance of leadership development, and now we're talking again on that topic of succession. Is it better to bring up, to build up in-house talent, or is it better to go outside the company and bring in a powerful savior? Someone who can come in like Superman riding onto the scene to save the day. Which is better? Okay. Again, study of public companies from this article by Jeffrey Sonnenfeld, by the way, who read a great book. Oh god, I can't think of it now. The Hero's Journey. Jeffrey Sonnenfeld, great book from 30 years ago. Loved it. Can't find it on my bookshelf anymore. Someone may have borrowed it.

Anyway, we're talking about succession. And what about this is important to you? Come on. It's always discussed in our peer groups and at Boot Camp. They looked at public companies because it's easy to study public companies. Target, IBM, Eli Lilly, Bank of America, Johnson & Johnson, Pepsi, General Motors, et cetera. And they said, quote, "Internal CEOs have consistently outperformed external CEOs with dramatic out-performance in total shareholder return, or TSR. Total shareholder return."

So they looked at one year transitions. There were 61 total. Outside CEOs produced a total shareholder return of 9.01%. Inside, there were 39 of those, almost 15%, 14.81%. So a big out-performance there. What about transitions over the last three years? There were 22 of those as well. How does that number work? I'm not sure. 6.35% for the outside CEOs that were hired, 10.16% for the inside CEOs that were elevated. Another big out-performance.

Why does Sonnenfeld think that that's the case? Insiders have some built-in advantages. Number one, they avoid the incorrect attributions of success. If I came from XYZ Corporation from 1,000 miles away, I've got stuff on my resume, you've talked to people with whom I've worked. But was the success of that company or that department because of me or because of other factors inherent in that company that you can't really know about because you weren't an insider there?

Number two, the insiders have firsthand knowledge of ... I'm sorry. The senior leaders have firsthand knowledge of the successor's leadership, strengths, and achievements, right? Because they've witnessed them, they've viewed them as this person has made his or her mark on the company. Harder to verify, as I mentioned, for the outsiders.

Number three, insiders can usually hit the ground running. They've already been in the flow of business and they understand the rhythms and the cadence of the business. So they're able to get started without a year long period of learning the business and evaluation and all that.

Number four, they have trusted internal and external relationships. Trade partners already know these individuals, right? Advisors to the company know these individuals, the bank, the bonding company, et cetera. They know who these people are. They've got internal trust and external trust. Number five, Sonnenfeld says, "An insider promotion reinforces culture and morale."

Hard to argue with any of those five points. Now, let me give you some caveats. So Sonnenfeld is saying, "Hey, this is a good thing to do. The numbers bear it out in terms of public companies. Let me give you some caveats from the other side of that coin." If you don't have super talented insider people, it's not smart to elevate them. It's not smart to install someone in senior leadership who's not capable simply because they are an insider. It's got to be merit. It can't be, "Oh, insiders work better, therefore I'm going to promote this person." That won't work.

The departing senior leader has to have clear boundaries. Great story. I know you've heard me tell this before, but I was talking to a young man in a family business ages ago and he said, "My dad lets me run 75% of the business now, but the trouble is on any given day, I don't know which 25% he's going to run." Great line. I'll never forget it. Thanks, John. The departing leader must have sound boundaries, otherwise there's going to be clash, there's going to be role confusion, there's going to be all kinds of potential morale problems in the organization, potentially even factionalism.

The business cycle has to be in a pretty stable condition. And why do I say that? Well, if a departing leader decides to cut back and elevates a junior leader to that senior position, and suddenly the economy goes ... there's going to be a lot of questions that are going to be uncomfortable for both.

So part of your succession planning has to take account, what does the business cycle look like for the next two or three years? That person, that individual that comes up to a more senior role, that person needs a clean break from the previous job. So if you're elevating a project manager or a BD person or an estimator or someone else, a CFO, that person already has a 60-hour a week job, maybe 80 hours a week, right? So you can't give them another 60 hour week job on top of it. That's crippling. That's not going to work. So you've got to backfill, right? Success is not about elevating people. It's about backfilling people once you elevate them with more talent. So obviously the talent bench has to be strong.

And then finally, if that person that you're elevating doesn't have internal support, if it's considered a nepotism hire or it's considered an elevation of someone who hasn't earned that spot and that internal support where there's a way, that's going to be problematic too. So there are some caveats. You can't just install insider for the sake of installing an insider. There's got to be more business reasons why that would be the case. What do you think? Email me at [email protected].

This is Wayne Rivers at PCA, where We Build Better Contractors.

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