Future success requires CEO succession planning

Nothing succeeds like success, as the saying goes. For credit unions seeking to secure their future, nothing succeeds like ensuring a smooth CEO succession.

Hiring a CEO is one of the biggest challenges facing credit union boards, says Kevin Smith, consultant/publisher at TEAM Resources. “It’s also the most important work of the board—and it takes longer than anyone thinks.”

Lack of adequate CEO succession planning often results in a poorly thought-out successor who’s not well-suited for the credit union or is ill-prepared, he says.

“There are several bad scenarios for not having a CEO succession plan, but the worst-case scenario is that the credit union goes away completely—usually a merger because the board doesn’t know what else to do,” Smith says. “An attitude of ‘we’ll cross that bridge when we come to it’ often results in a merger or takeover.”

A board blind spot

Credit unions without a viable succession plan aren’t alone.

Succession planning has long been a blind spot for boards, according to researchers J. Yo-Jud Cheng, Boris Groysberg, and Paul Healy, writing in the Harvard Business Review. Their 2016 global survey of more than 5,000 board members found 41% of boards don’t regularly discuss CEO succession, and 54% don’t have an effective planning process for CEO succession.

‘My version of a viable plan is when the chosen successor leaves within a year of taking charge, but the board doesn’t panic.’

Kevin Smith, TEAM Resources

More than half (54%) have no contingency plan.

Researchers Robert Hooijberg and Nancy Lane found similar results. “The strategic importance of CEO succession is indisputable, and the elements of effective succession planning have long been known,” they write in the MIT Sloan Management Review. “So, why do many boards plan poorly for CEO succession when the cost of failure is so high?”

Hooijberg and Lane cite three reasons:

1. Boards don’t align the hiring criteria for the future CEO with the organization’s strategic needs.
2. Boards are reluctant to antagonize the incumbent CEO by confronting succession planning.
3. Boards fail to address executive development below the CEO level.

A proposed rule from NCUA would require federal credit union boards to establish and adhere to processes for succession planning to ensure “the credit union has plans to fill key positions, such as officers of the board, management officials, executive committee members, supervisory committee members, and (where provided for in the bylaws) the members of the credit committee to provide continuity of operations.”

The rule also would require board members to be knowledgeable about the credit union’s succession plan. NCUA notes that although the proposed rule would apply only to federal credit unions, the purpose is to encourage and strengthen succession planning for all credit unions.

NEXT: Key elements

Key elements

Smith believes a key element of a CEO succession plan is a board discussion about what the ideal CEO’s vision and approach will be.

The board’s top priority should be to determine their priorities for the successor, he says. “This ideation may result in a unicorn—impossible to find. So, it’s okay—in fact, necessary—to compromise from there. All the directors need to be on the same page.”

Boards must consider a variety of plans, options, and scenarios, Smith says. Multiple plan options are crucial because situations change, or people change their minds, get poached by rivals, or switch industries.

“Contingency plans are necessities,” Smith says. “Today’s world is complex, and too many things can go sideways.”

CEO succession plans should include both long-range and emergency plans, which likely are already codified in the business continuity plan. According to the consulting firm Korn Ferry, when organizations engage in effective succession planning, they:

• Ensure they have the talent needed to achieve their strategic goals.
• Reduce the risk of having too few “ready now” candidates.
• Attract, engage, and retain high-quality candidates.
• Address stakeholder pressure to plan for the future.

Internal vs. external candidates

When the long-term CEO at Oxford Federal Credit Union in Mexico, Maine, announced his retirement in November 2020, he and the board initially looked internally to gauge internal interest for the CEO position.

After determining that leadership team members were fulfilled in their current roles, Oxford Federal added an executive vice president (EVP) position, says Joann Bisson, who took over the helm of the $310 million asset credit union in February 2023. “We stressed that the EVP wouldn’t be the ‘heir apparent,’ but it would be a good opportunity for the board and the individual to work together.”

‘Being able to preview a potential candidate is invaluable.’

David Leclerc, board chair, Oxford Federal Credit Union

“Being able to preview a potential candidate is invaluable,” adds David Leclerc, board chair. “In addition to the feedback from our prior CEO, the year that our EVP worked with the credit union gave us the opportunity to measure how she fit in with our culture and to see the chemistry develop within the management team.”

The board acknowledged that the EVP shouldn’t necessarily be the automatic choice for CEO, but ultimately appreciated the chance to appoint someone “they knew from day-to-day experience as opposed to having to interpret competence and character during a few limited interviews,” he says.

Shelly Mellenberger was one of three internal and eight external candidates considered when she was named president/CEO at $449 million asset PCM Credit Union in Green Bay, Wis., in April 2023. The board recognized that obtaining employee feedback on what they wanted in their new CEO was a key element in the selection process, says board member Karen Sylvester.

“Our culture is very important,” says Christina Connell, PCM’s vice president of human resources. “As a smaller credit union with fewer than 50 employees, all of our staff knew the retiring CEO personally and talked to him daily. We conducted a staff survey, and directors asked employees about their views.”

In August 2022, Devon Lyon joined $790 million asset Central One Federal Credit Union in Shrewsbury, Mass., as CEO. Only the third CEO in the credit union’s 70-year history, Lyon was selected after a nationwide search.

The process was robust, Lyon says, and included multiple interviews, a strategic plan project, and a lengthy conversation with the search firm’s consultant, a retired CEO who asked specific strategic and tactical questions.

NEXT: Search firms

Search firms

The use of a search firm may be advantageous for boards that don’t have much experience hiring CEOs, says Smith. However, not all directors may agree.

Some believe the price is too high. For example, a typical contingency-based executive search firm may charge a fee of 20% to 30% of the candidate’s first-year salary.

“The cost is often shocking to boards,” says Smith. Other boards may believe it’s worth the investment to secure the right person for the job.

Finding a search firm that can understand the culture of the board and the credit union is essential to the working relationship.

Prior to choosing a firm to aid in its CEO succession, PCM and Central One Federal each interviewed three search firms. In consultation with the credit union’s human resource department, a committee of Central One Federal’s board reviewed the methodologies and screening criteria the firms used prior to making its selection.

Another key element of a succession plan is researching realistic salary comparables, Smith says. Looking back, Sylvester would have tapped the search firm to assist with setting up a compensation package.

‘Have a plan, and make it a regular topic of conversation.’

Devon Lyon, Central One Federal Credit Union

“Somehow, the board missed the contract element,” she says. “So, with the assistance of human resources, we developed the package ourselves. In hindsight, I wish we would have used the search firm for this as well.”

The CEO and board should discuss the succession process regularly, Lyon says.

“It’s important for both sides to know if there are potential internal candidates, or if the credit union needs to look outside,” he says. “Have a plan, and make it a regular topic of conversation. The tenure of the CEO and their retirement plans will determine the steps and frequency of having these discussions.”

In an ideal world, succession planning should start the new CEO is hired, Smith says.

“The board is wise to establish that expectation from the start, and ensure that plans are living organisms that develop, change, and evolve constantly,” he says. “The next best time to do this is today.

“My own version of a viable plan is when the chosen successor leaves within a year of taking charge, but the board doesn’t panic,” Smith adds. “They have other options, and know what the next steps are. No one is flummoxed.”