The CEO Succession Question: Does Your Company Have a Plan to Continue Leadership?

Trem Smith took the reins of Berry Petroleum Corp. in March 2017 after the company emerged from the bankruptcy of former owner Linn Energy. 16 months later, on July 26, 2018, Berry launched a successful IPO.

And a few minutes after that (give or take), Smith began talking to Berry’s board about who would replace him as CEO.

Not that he didn’t like his job. Far from it. But finding a successor was, to Smith, a critical component of doing his job.

“Everyone thinks my main job is to run the company, but really my main job is to find my successor,” Smith told Hart Energy, quoting an executive from earlier in his career.

“I feel like I can leave as CEO having been quite successful.” —Trem Smith, Berry Corp.

“When we went public, it became very clear that that was a cue,” he said. “I understood what he meant. And so, the board and I started thinking about this, literally meeting after we went public: What would happen if I got hit by a bus?”

The solution: long-term succession planning.

‘You’ve got to have a plan’

The approach to succession taken by Berry Corp. (the company changed its name in 2020) is not universal, specifically in the oil and gas space or the corporate world in general. A lot can get in the way of a smooth, orderly transition.

Sometimes it’s office politics, such as nepotism precluding a search for a qualified leader.  Sometimes it’s conventional politics, such as new Brazilian President Luiz Inácio Lula da Silva choosing the CEO of state-owned Petrobras.

And other times, it’s considered a conversation to put off for another day.

“I walk through conferences and I talk to business owners and I get, ‘we’re not there yet, we’ll get to it later,’” Kendall Rawls, director of development for Rawls Succession Planners, told Hart Energy. “But the problem is, without them having any sort of strategy for the future, they’re basically setting themselves up for failure.”

A PwC survey of members of boards of directors found the biggest challenge to more timely and effective CEO succession planning was the current CEO performing as expected. That reasoning leaves the company vulnerable to a CEO’s sudden debilitating illness or death or, for that matter, unexpected resignation.

“Our world has thrown us a few curveballs lately in terms of succeeding through COVID and the Great Resignation,” Rawls said. “You can’t have a successful business without great people and talent to push the mission forward and serve customers. What we do is work with business owners to partner with them to build strategies for the possible, the probable and potential issues impacting their business.”

Succession planning aims for the ongoing success of a business through the next generation of owners, leaders and managers, she said. And that takes time.

“You ought to be thinking of a successor CEO, No. 1, before you know you need a successor CEO,” Joe Ahmad, founding partner of the AZA law firm in Houston, whose practice focuses on executive employment, told Hart Energy. “In other words, I think you ought to have a plan at all times. You shouldn’t wait for the CEO to announce they’re going to leave because you may not get any warning. You’ve got to have a plan.”

‘Don’t screw it up!’

Berry Corp. traces its roots to 1909 in Kern County, Calif.’s San Joaquin Basin, where the current iteration of the company concentrates its efforts with mature, low-decline oil wells. Production in third-quarter 2022 averaged 25,800 boe/d from wells in California and Utah’s Uinta Basin.

Net income in the quarter was $191.7 million, with adjusted EBITDA of $97 million. Quarterly dividends totaled $0.47/share, a result of the company’s shareholder return model that will end up paying shareholders the equivalent of the company’s $700 million market capitalization in three years.

The largest institutional investors in the company include Oaktree Capital Management, AllianceBernstein, Hotchkis & Wiley Capital Management, BlackRock Inc., Fidelity, Vanguard Group, State Street Corp. and Benefit Street Partners. Furthermore, stock rating outlet stocknews.com mentioned it as the one energy stock to buy in 2023.

“I feel like I can leave as CEO having been quite successful,” said Smith, who now holds the title of executive chairman. “I’m very proud of that.”

Smith hired Fernando Araujo, who took over as CEO on Jan. 1, as the company’s COO in September 2020. Araujo, an industry veteran with experience in executive roles at Schlumberger, Apache and Repsol, became the prime candidate for the top job.

Smith had a clear idea of what he was looking for in a successor. The chief executive of a California oil and gas company must be able to navigate a much different cultural landscape than a counterpart elsewhere in the country.

“When you’re in California, it’s like being in a foreign country compared to Texas,” he said.

Araujo had experience managing operations in Egypt, Canada and, with Schlumberger, E&P assets in 10 countries. He had run profit/loss centers at those companies and, as a trained mechanical engineer, brought a depth of understanding of the oil industry to his role as COO and present role as CEO. What he lacked, Smith said, was familiarity with the demands on a CEO of a public company, and Smith was happy to teach him.

High-level transitions are not always easy but can be rewarding for the executives and the company’s stakeholders when done right.

“If I sound enthusiastic about this—and I am—it’s because it’s really hard,” he said. “Most things you read about on succession planning are failure, OK? That’s why you read about it, because it’s a story. It looks like we’ve done this fairly well, and that’s good.”

And as an investor with a substantial financial stake in Berry, Smith has a personal interest in Araujo’s success.

“We’re counting on him,” he said in December prior to the succession. “I just basically told him the other day, ‘Don’t screw it up!’”

‘Big egos’

Critical to a succession plan is determining who is in charge of choosing an eventual replacement for a company’s top leader. Typically, that is a committee of members of the board. Sometimes it is delegated to the CEO, which has the potential of pushing the process sideways.

“I hate to say it, but CEOs have big egos,” Ahmad said. “They’re really good at making themselves look good. They’re not always good in finding somebody else that can have that spotlight.”

"I think one of the biggest roadblocks for an owner not doing succession planning is humility.” —Kendall Rawls, Rawls Succession Planning

The board, he said, has to take the primary responsibility and not completely delegate.

“I think if they look at it purely in terms of what’s best for their shareholders and not in terms of what’s best for the outgoing CEO, oftentimes they’ll reach a different decision,” Ahmad said. “They can create a mess if they do otherwise.”

Smith is well aware of CEOs whose egos simply won’t allow them to step away.

“I would like to think I’m not like that,” he said, “and so, I don’t think it’ll be a problem whatsoever to give up the control. I like the idea that we’re handing off a solid foundation for the team. There’s everything in place for this team to be successful and, to me, that is really a big win.”

Bob Iger, who reclaimed his post as CEO of the Walt Disney Co. three years after retiring, found it difficult to step away. He kept an office and was reported to have undermined his successor, Bob Chapek, by holding meetings with senior executives without his knowledge. The Wall Street Journal reported Iger told people that Chapek was not up to the job.  

General Electric (GE) chairman and CEO Jack Welch insisted on control of his succession process. He later admitted that pushing the board to hire Jeff Immelt was the worst decision of his career.

“Mr. Welch at GE, he probably had a ton of business advisers around him giving him advice and perspectives,” Rawls said. “My assumption is, if he regretted it, he wasn’t open to listening to other people’s perspectives.”

In fact, it’s been reported that several board members warned Welch against Immelt.

Titans of the corporate world are not alone allowing their egos to get in the way. Smaller, private and family-owned businesses face the same hurdles.

“I think one of the biggest roadblocks for an owner not doing succession planning is humility,” Rawls said. “They don’t know it all. No one can know it all. They can be really great at their job. They can be really great at knowing the industry, knowing the business and being an entrepreneur, but unless they’re open to listening to other people’s perspectives, I would say that is another potential detriment that impacts the organization.”

Part of the problem is the misperception that succession planning is code for retirement and exit from the business, she said. This can be rough on the psyche of a leader for whom the business provides a creative space and social network.

“Businesses involve people and involve emotions and visions and expectations for the future,” Rawls said. The succession planning process needs to account for what the owner and all key players in the business want.

“There’s no way to develop a successful strategy without delving into the interpersonal dynamics,” she said.

‘All sorts of shapes and sizes’

The consequences of not putting together a succession plan in advance vary, depending on the circumstances of a particular company. But there are consequences, nevertheless.

“What they’re doing is putting their entire business at risk,” Rawls said. “And their successful competitors, the ones who are winning at the consolidation game, are in a position to either compete against the big guys or be in a position to buy up smaller organizations or those who are struggling.”

Even owners unsure whether they want to continue running the business, or who intend to sell, put themselves at risk. A leaderless company with an uncertain future is unlikely to command top dollar.

At a larger public company, chances of collapse are less likely, but consequences from a lack of planning can be almost as harsh.

“You ought to be thinking of a successor CEO, No. 1, before you know you need a successor CEO.” —Joe Ahmad, AZA law firm

“You end up with a CEO that’s either unqualified or not ready, not prepared,” Ahmad said. “No. 1, you shouldn’t be in a rush to find somebody, and you can be in a rush if you don’t have a plan in place. A CEO can make all the difference in the world for shareholder value.”

Boards without a plan in place when a CEO departs often turn to an internal choice just to keep the company going as is. That person, he said, may or may not be the best to lead the company. And that thinking ignores the complexity of choosing an executive to lead.

“It takes a long time,” he said. “It’s not easy. You don’t call the search firm one day and have a CEO candidate the next. So, my thought is, really, the earlier, the better.”

Delaying the process also limits options. Berry was able to transition not just a CEO but an entire team. The former general counsel is now the president, and the chief accounting officer has taken on the role of CFO. But promotion from within may not be the best strategy for every organization.