Engineering and construction (E&C) companies have faced challenging times over the past several years. The protracted oil and gas downturn resulted in fewer large-scale projects, leading E&C companies to venture into new industrial sectors and government services. In addition, these financial tribulations sparked a wave of M&A activity. Such significant changes require a strong CEO to guide the company through changing times. How are E&C companies finding CEO talent and what type of background should the CEO have?

In Search of the Strategic CEO

In an industry that is constantly reinventing itself and navigating increasing volatility, finding a strategic leader who is able to work effectively with the board to drive positive change and leverage growth opportunities is difficult. Part of the issue may stem from the way executives are developed in E&C companies.

Most are engineers who started their careers as project managers, ascending the ranks as they were given more responsibilities. Top employees typically move into a chief operating officer position that is often still tactical in nature. Not many are given the opportunity to take over roles in strategic planning or corporate development, where they need to look beyond the next few years and help shape the company’s future. By the time high-potential executives are identified, companies may not have enough time to put them through a holistic development plan, as it could delay their succession plan. The result is the appointment of a CEO with a solid operational background, yet light strategic acumen.

Successfully integrating acquired organizations, retaining top talent and leveraging new synergies is another pain point for many E&C companies. The value of a high-profile acquisition can be lost if employees become disenchanted with the combined organization and leave. Ensuring that up-and-coming executives have been exposed to best practices in M&A activities, ideally having led a full integration exercise, would better prepare them for an eventual CEO position.

Successful Succession Planning: Looking Outside the E&C Sector

CEO succession planning and selection are two of the most important responsibilities boards have. Choosing the next leader from the ranks of the organization may not always provide the company with the leader it needs. To find the right person for the job, boards must focus on where the company is heading and what competencies the new CEO should bring. An openness to talent from outside the E&C sector could benefit companies tremendously, allowing new perspectives into the organization. While industry knowledge is a plus for any CEO, it should not be the only factor in the selection process. However, research shows E&C companies tend to look in their own sector for CEO hiring. In an analysis of more than 100 global E&C companies and their CEOs, only 25% of companies had CEOs from outside the industry.

Should E&C companies expand the talent pool and explore new sectors? Will this unlock additional avenues for strategic CEOs? Based on an analysis of the top 15 firms in each region (Americas, Europe and remaining countries), companies with non-E&C leaders achieved higher growth rates in both revenue and market capitalization.

The data suggests that there are other important competencies non-E&C CEOs bring and that may help them to be more successful.

As a case in point, Jacobs hired its new CEO in 2015 from outside of E&C industry, and the company launched a new transformational strategy in 2016. As part of the new strategy, Jacobs acquired CH2M in 2017, which helped them gain capabilities in government services, infrastructure and other industrial services. It has also divested energy, chemicals and resources energy division to transform its portfolio. Revenues grew from $12.7 billion in 2014 to $14.9 billion in 2018 and outperformed the S&P 500 and the peer group in market returns.

Look for Potential When Hiring a CEO

Claudio Fernández-Aráoz, author of “Great People Decisions,” offers one explanation on how subconscious tendencies can derail the most well-intentioned efforts:

“As a rule, we humans like to stick with the familiar. We talk about finding a ‘good fit’ between the organization and the individual. In many cases, that is code for hiring a person who represents the comfortable and the familiar. Certainly, familiarity can bring stability to any community. But it can also lead to myopia.”

This does not mean E&C companies should only look outside the industry for a CEO. Organizations should take an honest look at their own executives and determine how they measure up with the talent available in the market. By assessing their own bench strength, CEO succession planning becomes an ongoing and systematic process. Taking a candid view of the strengths and shortcomings of their own executive development programs would allow them to implement measures to develop future leaders. The end goal is a healthy pipeline of well-rounded executives, rather than specialists in a narrow field.