Prior to the pandemic, business owners and business leaders may have been preparing to exit their business sooner than expected. However, a statistical trend indicates that the unexpected circumstances may have prompted business leaders to hold down the fort longer than anticipated.
A recent study by non-profit The Conference Board indicates that only 71 companies in the Russell 3000 Index switched CEOs during the second quarter of 2020. At 11 percent turnover, that marked a record low dating back to 2008. If we look back to 2018, a PWC report states that CEO succession occurred at a blistering 19 percent. That figure increased by approximately 3 percent over the previous year, and the length of tenure was in sharp decline.
Business owners and CEOs appear to be staying in place to weather the economic storm brought on by the virus. News reports from outlets such as CNBC support that conclusion anecdotally. The media outlet interviewed CEOs such as Bill Furman of Greenbrier, a railroad freight equipment supplier, who confirmed he postponed retirement for two years due to the crisis.
“The current COVID-19 crisis and accompanying environment of economic uncertainty requires an experienced industry and management team to lead Greenbrier through extraordinary times,” a company press release reportedly stated. “Effective management through the pandemic and the current economic uncertainty is the company’s most pressing priority.”
Although dedicated industry leaders appear willing to stay the course, for now, the retention bubble will likely burst soon after herd immunity is accomplished. This, in turn, could result in a leadership epidemic. These are reasons why it is wise to act decisively to shore up weakness and plan for imminent succession. Likewise, CEOs holding the reins longer than they planned are also tasked with ensuring sustainability after they gracefully exit. These are tough questions everyone should be asking right now.
Can Business Value Be Maximized Before A Leadership Change?
Corporations went into crisis mode when the pandemic hit. But enough time has also passed to implement forward-thinking strategies and policies. Although many businesses continue to operate differently and will make hard post-pandemic choices, maximizing value now will deliver a long-term return. Owners, board members, and leadership teams may want to expand their focus beyond revenue streams.
Will the Business Serve Your Financial Needs After Exiting?
CEOs and business owners who originally planned to sell prior to the pandemic remained in charge due to the economic upheaval. But as supply chains and markets continue to stabilize, the opportunity to enjoy retirement draws closer. The question exiting owners need to have answered before leaving is whether you want or need the organization to remain profitable.
Family-held enterprises often pass along the leadership mantle to an heir or hire a CEO with the ability to sustain the legacy. That usually means that family leaders remain invested — personally and financially — in future outcomes. Another scenario involves selling the company to business professionals or family members over time. This generally involves buyers providing a lump sum when you exit and payments over a period of time. This revenue stream may inevitably be linked to the company’s profitability.
Each of these above scenarios are reasons to make a concerted effort to streamline productivity, increase value, and position the corporation for maximum profitability before economic normalcy has been restored.
Can the Organization Thrive Without Its Current Leader?
Perhaps the most common misstep that owners make stems from not preparing for succession. A false sense of security commonly exists that the current decision-maker will be there tomorrow, next week, and next year. The facts do not support such conclusions.
Statistically, the average CEO tenure lasted only 10 years before the economic disruption caused by the pandemic and was already getting shorter year-over-year. In 2019, the average retirement age of this demographic dwindled from 62 to 59 years old. By 2022, a leadership vacuum could suck the experienced talent from wide-reaching industries. These are ways to prepare your organization for leadership changes so that it can continue to thrive.
- Identify key leadership positions
- Create a working group to evaluate in-house talent
- Identify suitable successors within the organization
- Implement a mentoring process that develops knowledge
- Work with the next generation of business leaders to hone skills
The importance of leadership exit planning cannot be understated. When the economy fully stabilizes, those who postponed their exit may leave in mass. Given that others will also time out as well, experienced people will be in short supply. What you do today to secure your organization will impact its future, one way or the other.
The team at Penta Wealth Management can help position you and your business to be ready for your exit. Proper exit should begin years before your exit and should be an ongoing process. Our Value Acceleration and Transition Services break the exit planning process down into three parts: Discovery, Preparation, and Decision. Contact us today by emailing info@pentawm.com or call 888-447-3682 to learn more about the exit planning process or schedule a meeting with one of our advisors.
Sources
https://conference-board.org/topics/ceo-succession-practices/ceo-succession-practices-2020
https://www.cnbc.com/2020/12/10/ceo-turnover-hit-lowest-levels-in-years-amid-covid-outbreak.html
