Market Trends & Perspective

Succession Planning — the basics

Warren Buffett’s age and Steve Jobs battle against cancer have propelled succession planning to the forefront of corporate governance discussions throughout Corporate America. Succession planning has long been recognized as a component of the Board’s responsibility, yet in reality this aspect of corporate governance has been given more lip-service than action, as we witness the unimpressive state of succession planning in two of America’s most valued enterprises – Berkshire Hathaway and Apple. While there are certainly exceptions, credit unions as a whole are not shining examples of conscientious succession planning.

A Corporate Governance Responsibility

Corporate governance experts recommend that the board address the issue of CEO succession at least annually, assess the likelihood of experiencing a transition in the short term, and plan for succession, regardless of when it is likely to occur. This approach will maximize the chances for continued success of the credit union. Typically, there are two types of succession triggers the board needs to be prepared for; one is the planned CEO’s retirement, the other is unplanned transition. Unplanned departures of the CEO are typically the result of health issues, recruitment by another organization, and termination for performance issues. It is the unplanned departures that serve as the underlying reason for succession planning to be an ongoing actionable responsibility of the board. Succession planning begins with fixing responsibility for leading the process. Boards have delegated this responsibility to one of a variety of board committees – the Executive Committee, the Compensation Committee, or a specifically established Succession Committee. Under normal circumstances the CEO is asked to be a resource to the committee and his / her input is important information which the committee impounds into their process.

Strategy is the Foundation

The foundation upon which an effective succession plan is built is agreeing upon the credit union’s strategic imperatives; not only the present strategic imperatives but also asking what changes can be seen coming down the road in the next 3-5 years that could impact the credit union’s business model. What changes does the committee foresee in the economy, the retail financial industry, the credit union system, and technology that are likely to be expressed in the next three to five years? For example, in working with our clients on succession we have encountered credit unions that plan to make seismic shifts in their strategies, such as changing from a TIP charter or a SEG dominated charter to a community charter. Looking down the strategic path three to five years for possible significant changes will help sharpen the board’s focus on the successor profile. Other boards have concluded that the impact of technology on future generations will profoundly impact how their credit union will communicate with and deliver products and services to the membership.

Chances are that your next CEO will face an entirely different environment than your current CEO had to face at his/her hire date and consequently your measuring tool, the CEO Candidate Profile, will need to be adjusted. Agreeing upon strategic imperatives and determining the skill sets, education and experience that is required to execute those agreed upon strategies, along with the leadership and communication style, form the substance from which the candidate profile is constructed. Drafting and periodically revising the candidate profile based on the credit union’s changing strategic imperatives and the changing business environment is an important deliverable for the Succession Committee to discuss with the board annually.

From where is the Candidate Pool Drawn?

Armed with a CEO Candidate Profile, the Succession Committee is prepared to begin addressing the sources from which CEOs are drawn. Successor CEOs are drawn from two primary sources – internal candidates who have been groomed as possible CEO successors, and external candidates who are recruited from a national pool of talented professionals. Smart organizations keep both options alive and well in order to maximize the success of CEO succession planning. It is interesting to note that studies indicate that CEOs of the largest American Corporations come from the senior ranks inside of the organization a large percentage of the time – up to 75% according to Brendan Sheehan of the international recruiting firm of Korn / Ferry. This is understandable, because these organizations often have tens of thousands of employees and senior executive ranks. Their internal candidate pool is very deep. Our experience is that within credit unions, CEOs are drawn from the senior ranks about 40% of the time, and from a national pool of external candidates about 60% of the time. The internal candidate pool is typically comprised of “C” level members of the management team at the Senior Vice President or Vice President level. The national pool of external candidates is typically comprised of “retail banking/credit union professionals (95% drawn from the credit union system and 10% drawn from banks, primarily community banks). Candidate pools for many credit unions include at least one internal candidate.

Timing of Leadership Transition

The Succession Committee should assess the likely timing of CEO transition for their credit union. Once this assessment is made the committee should focus their efforts on determining which candidate options, internal, external or both, are most appropriate for the estimated transition timing. It is important for the committee to position their estimation of the likely timing of CEO transition as a planning tool only and not a means of signaling to the CEO that there is building pressure for him/her to depart.

Armed with this information the committee should then determine which of the two candidate pools, internal or external candidates, or both, should be utilized.

The Two Candidate Pools

Credit Union Succession Committees should focus their energy and resources on understanding which candidate options are most appropriate for their succession strategy, given that the transition could occur at various points in time. The other piece of the succession puzzle is to gain an understanding of when the CEO leadership transition is most likely to occur. Collecting this invaluable information is admittedly a delicate issue and care should be taken to communicate this information is only for planning purposes, and is contingent upon the occurrence of an unplanned transition which, by definition, implies that a transition is not expected to occur. The availability of qualified candidates in the external national pool is usually not an issue. At almost any time there are candidates who can fulfill the basic criteria for a credit union CEO search. Boards would do well to track high performing credit unions, particularly those in their market who have similar business models or those who have business models the credit union aspires to emulate, and attempt to understand their strategies and success in executing those strategies. Monitoring websites and tracking financial performance through peer credit union benchmarking are two tactics that can be employed when keeping boards aware of high-performing credit unions. This approach positions the board well for knowing where to begin looking for external candidates when CEO transition is imminent. The availability of the internal candidate pool can present challenges. In a perfect world, internal candidates would be ready, willing and able to compete for succession at the time the transition is to take place. It is no mean trick for an internal candidate to be ready at the same time as the transition. More often, either the internal candidate is not yet ready to succeed, needing more experience; or the internal candidate is ready well before the transition is to take place. In the later case, the internal candidate often senses that the opportunity to succeed the present CEO is too far down the road for their career path and consequently leaves the credit union for another opportunity. This is the price the credit union pays for the fickleness of timing. However, we believe that under most circumstances it is in the credit union’s best interest to continuously invest in grooming their high potential executives for CEO leadership. All along the continuum of the grooming process – cross-training, leadership coaching, mentoring – the credit union benefits from their investment in these individuals because they are, or should be, improving their execution, collaboration and strategic skills. Even if the high potential executive departs the credit union for another leadership opportunity, their contributions remain. An unintended consequence of these well intentioned efforts is that as the management team increases their capabilities, some CEOs realize that their stress is significantly relieved and this increases the likelihood that the CEO will adjust their retirement date to a later point in time. If the money’s good and stress has been lowered, and the credit union is performing well, it is understandable why CEOs would extend their stay. Keep in mind there are solutions that create incentives for the internal candidate to stay and incentives that encourage the retiring CEOs to retire as planned.

Gary Hourian, in a recent article in  NACD Directorship, points out that the current CEO’s compensation can be tied in part to their efforts in the internal candidate grooming role they are asked to play. There is even talk in corporate America of paying a post-employment bonus to the retired CEO if the organization meets certain performance measurements in the three years after his / her departure. While we have not noticed credit unions linking the CEO’s compensation to succession planning, the idea is worthy of consideration.

Leadership Team Assessment

We at O’Rourke and Associates have been helping large credit unions gain an independent, fact- based understanding of their options to continue their credit union’s success through the next generation of leadership. We believe an assessment of your Leadership Team, as a component of the Board’s responsibility for long term succession planning, is fundamental to sustaining your credit union’s success. Our services will help the Board and the CEO understand the capabilities of potential successor CEOs on your leadership team. We assess their technical and leadership capability to execute the credit union’s strategic imperatives and we assess their relative competitiveness against a pool of external candidates who would likely vie for the successor CEO position when the present CEO departs.

Culture vs. Change

Internal candidates typically bring the advantage of maintaining consistency of the credit union’s culture, member service philosophy, and business model; while external candidates bring the promise of new ideas, diversification of experience and success, and perhaps a greater willingness to consider change. Determining which succession option is the appropriate one can turn on the question of Culture vs. Change If culture is integral to the success of your credit union in serving its members, then a qualified internal candidate presents a significant advantage to the credit union. When interviewing some credit union leadership teams and boards we have heard that the greatest risk to the credit union in the CEO succession transition is that the culture may suffer. Alternatively, we have heard from leadership teams and boards of stressed credit unions or credit unions that plan to execute a significant change in strategy, that change is essential to the success of the credit union. In those cases an external candidate with experience in turning around a stressed credit union, or experience in executing the strategic change the credit union is contemplating, would present a significant advantage over an internal candidate.


Succession planning is a key responsibility that boards should  continuouslydrive in order to assure that credit union members continue to receive an uninterrupted and undiminished flow of value- driven products and services in the event of a leadership transition.

Know someone who would find this interesting? Share it now!Share on facebook
Share on twitter
Share on linkedin
Share on buffer
Share on email