CEO succession

You can't afford to miss a beat.

It's no longer a question of whether a credit union will write a succession plan. The question is how detailed the plan will be.

That's because state and federal regulators are taking an interest. The National Credit Union Administration (NCUA) lists succession planning as one of seven internal controls in Letter to Credit Unions No. 161.

"Succession plans are a necessity," says NCUA Board Chair JoAnn Johnson. "Assets are increasing, credit unions are becoming more sophisticated and complex, and management is aging." Johnson spoke at a succession planning workshop the Washington Credit Union League sponsored.

NCUA Letter No. 161 states: "A detailed succession plan that provides trained management personnel to step in at a moment's notice is essential to the long-term stability of a credit union. A succession plan should address the CEO and other senior management positions."

The CEO and/or human resource (HR) manager writes a credit union's staff succession plan, says Gene Mandarine, management training director for HRValue Group, Middleton, Wis. But the board of directors ultimately adopts the plan. So board members are keenly interested, particularly in CEO succession.

Mandarino says a succession plan, at a minimum, must cover emergency succession: Who assumes the CEO's responsibilities if the CEO dies or is suspended for suspected wrongdoing?

"You have security issues and passwords, questions to answer on what gets shut off and what gets turned on," says Mandarino. "And there's the list of calls to make to report on the transfer of authority."

Emergency succession

When Wright-Patt Credit Union President/CEO Patrick Gantt died unexpectedly July 1, 2000, the Fairborn, Ohio-based credit union didn't have a formal succession plan. But things worked out because of a strong board and management team, says Doug Fecher, who became interim and later the new president/CEO.

All members of senior management were contacted on that fateful Saturday. The board met Monday. Senior management also met Monday and decided how to proceed until receiving direction from the board. At a second meeting, after reviewing management team personnel records, the board named Fecher acting president.

Together, the board and management handled "an amazing amount of notifications," including NCUA and the state regulator, says Fecher. That first week the board and management team attempted to keep everything "operating on an even keel," he recalls. Part of that process was reassuring employees about what would happen next.

For instance, credit union officials decided not to close the $912 million asset institution for Gantt's funeral. But employees were given the opportunity to attend. Universal 1 Credit Union in Dayton supplied substitute staff during the funeral.

"We did most of the right things, but we did them without a plan," says Fecher. "That made the [subsequent] plan easier to write."

Wright-Patt now has a succession and leadership development plan. It covers the CEO, all senior leadership positions, and the positions reporting to those senior managers.

Typically a succession plan covers the CEO and senior managers. But Mandarine admits that for credit unions with fewer than 10 employees, the plan might start and end with the CEO.

Small credit unions usually cross-train employees to fill gaps when someone is out sick or on vacation. That cross-training could be considered a form of succession planning.

Staff assessment

A succession plan also can address staffing needs. To do so, it needs to draw from a credit union's strategic plan. "I tell people to look at the positions they've targeted for succession, superimpose them against their strategic plan, and ask, 'Do these job descriptions support the strategic plan?"' Mandarine says.

For example, if a credit union plans to amend its charter and expand its field of membership, it may want to add a business development director. The HR manager can assess the skill set of current employees and help the CEO align staff with staffing needs.

"This step can take many shapes, from testing tools, upward feedback, and peer assessment, to simply sitting around a table and hashing it out," says Mandarine. Employee assessment looks at education, experience, and past performance appraisals.

The board, CEO, and department managers are involved in Corning (N.Y.) Federal Credit Union's succession plan. "All managers are expected to develop a leader who could replace them or someone else in management," explains Anne Crowley, who replaced longtime CEO David Bartone Feb. 12 after a year and a half transition period.

"We focus on developing leaders, whether they replace their supervisor or go to another area. People with leadership capabilities can learn functions," she says.

However, Crowley admits crossing over into departments such as information systems or accounting may be difficult if not impossible. Certain disciplines require specialty backups from within the departments.

Corning Federal's board and CEO are involved in CEO succession. From there on down the organizational chart, the CEO and department heads take over. Crowley chooses her backup and recommends that person to the board. Currently, it's one of her executive vice presidents. They discuss his career regularly to confirm that he continues to aspire to be CEO.

Circumstances change, Crowley explains. She was on track to succeed Bartone once before but withdrew. Other department managers did the same. The credit union then conducted a yearlong search for a CEO. When the board couldn't reach consensus on a candidate, it asked Crowley to reconsider.

"I'm not driven by position or power or money. None of that influenced my decision," Crowley says. "In the end I wanted to do what was right for the credit union.

"The bottom line is, it's a tough job," she adds. "The closer you get, the more you realize that. Following in the footsteps of someone who has been successful at it for 25 years is even tougher." She joined the credit union 14 years ago as a teller and worked in all areas of the credit union.

During the transition, Crowley reorganized her senior leadership team into executive vice presidents of member services and administration. Additional team members include a chief financial officer (CFO) and managers of lending, business development, deposit services, information technology, and HR.

Staff development

The next step is staff development, with the goal of preparing people to move up. "Create a capabilities report on people based on their projected path," Mandarine explains. "They have a current and a targeted job description. You know where their competency set is now and where they're lacking. The plan outlines how you build the competencies they're lacking."

Thus, the succession plan also serves as an employee development plan. "Use the succession plan to drive learning throughout the organization," Mandarino says. The learning is directed by concrete steps such as attaining a certain certification or attending a workshop on lending law.

Those steps become part of an employee's performance plan and subsequently a part of their performance appraisal. "We recommend a professional development component be included in the performance appraisal," says Mandarine. "Here's how you did in your job. Now how are you doing with your professional development?"

In one credit union, 20% of the bonus is based on completing professional development steps, Mandarino explains.

Fecher refers to staff development as "bench strength." If there's a sudden vacancy, someone is being groomed to step into place.

Wright-Patt has a two-part succession plan: an emergency succession plan and a staff development plan. The emergency plan is reviewed and updated annually. "I meet with the board each December to decide who would be acting president," Fecher says. "But we don't tell the person we name. The practice at our credit union is not to have a second in command."

About one-third of companies (37%) tell executives they've been targeted for potential advancement, according to a survey by Boston-based Novations/J. Howard published in HR Magazine. There are pros and cons to naming successors. Doing so could be construed as an implied contract. That's why the succession plan never should guarantee job security or promotions.

Conversely, if talented employees are unaware of future opportunities, they may leave.

Top-performing companies, as measured by total shareholder return, are far more likely than other firms to consistently use a formal approach to "identify potential leaders," to "develop leaders," and to "track performance" of potential leaders, says a study by Lincolnshire, Ill.-based Hewitt Associates cited in HR Magazine.

But even among Fortune 1,000 companies, only 64% have a management succession process, and up to 70% of those plans fail. Two key reasons for failure: Senior management didn't "buy in" and "overdesigned" (read, paperwork-laden) processes.

The magazine reports succession plans work when integrated with the annual performance appraisal.

At Wright-Patt, the development part of the succession plan is part of managers' annual performance appraisals. "All seven senior managers report to me," Fecher explains. "The annual review is a two-part process. We do the performance review, and then we review career goals and personal development."

During that process, senior managers can declare whether they want to be CEO successor candidates. Development levels are set higher for those who do.

Before the Wright-Patt Board named Fecher its new CEO, it conducted an external search for CEO candidates. Im glad it did," says Fecher. "It's the board's fiduciary responsibility to make sure it gets the most qualified person."

Transfer of power

Some credit unions require an external search for a CEO even when there appears to be a qualified internal candidate. But others will name an internal heir apparent after a proving period. "That makes sense if there's a planned retirement," Fecher says.

That's what happened at Global Credit Union, Spokane, Wash. Jack Fallis became president/CEO Jan. 1 after a two-year transition leading to former CEO John Madri's retirement from the $288 million asset credit union.

The board decided to promote from within and named Fallis executive vice president six years ago. He got the No. 2 position but wasn't promised the CEO job. "That's when the board started looking at me, asking, 'Is Jack our guy or not?' " says Fallis.

Four years ago, the board penciled in Fallis' name to succeed Madri, and the official transition began two years ago. During those years, Fallis took it upon himself to get a master's degree in business administration from the University of Washington. "These things weren't required but certainly were encouraged," he says.

Fallis joined the credit union in 1985 as a teller and worked his way through the ranks. He comes from a credit union family. His father was board chairman of Inland Empire Paper Employees Credit Union in Spokane. He resigned when his wife, Dolores, became president/CEO of the credit union later known as Spokane Media Federal Credit Union.

Most credit unions want to promote from within, but only a third do. (See "Where do CEOs come from?" p. 42).

For two years, Global Credit Union in essence had two CEOs, somewhat of an expensive proposition. However, Mandarino notes it's not expensive if that transition saves the credit union from one costly mistake.

"Whenever there's change at the top, there's apprehension," says Fallis. "The employees knew me. They knew I was going to be president. It made the transition smooth for the board and staff."

When Fallis became CEO, the executive vice president position disappeared. During transition, Fallis created his "cabinet," consisting of four senior vice presidents: a CFO, chief operating officer, member business service officer, and a corporate communications officer responsible for public and government relations. Now Global is writing a succession plan for those senior managers. Until now, the succession plan was devoted solely to the CEO.

Retain talent

Sometimes a successor is named to retain talent. That happened at the Oklahoma Credit Union League last fall when the board named Lisa Finley to succeed President/CEO Bob Bianchini when he retires in 2005.

"The bottom line for us was that Lisa would have other opportunities," says Bianchini. "We wanted to make sure there's continuity."

Finley joined the league in March 1998 and held a succession of positions, leading to her appointment as executive vice president, a transitional position. The succession plan gives Bianchini and Finley two years to complete the transfer.

"It's a natural way of approaching my retirement," says Bianchini, who will have served 35 years with credit union organizations.

Bianchini says it gives Finley two years to assume CEO responsibilities. "And Lisa needs to find a Lisa," Bianchini adds.

Learn about board succession planning at

RESOURCES

CUNA:

1. Volunteer Achievement Program Course V422, CEO & Board Succession Planning. Call 800-3569655, ext. 4131, or visit training.cuna.org and select "SelfStudy Certificate Programs."

2. E-Scan's 2003/2004 CEO Total Compensation Survey (Stock No. 25341-CUM).

3. 2004/2005 Credit Union Environmental Scan Report (Stock No. 23118-CUM).

To order, call 800-356-8010 and ask for the stock number, or visit advice.cuna.org and select "Reports."

HRValue Group, LLC, Middleton, Wis.; 608-833-7747 or hrvalue group.com.

NCUA, Alexandria, Va.; 703-5186300 or ncua.gov.

Copyright Credit Union National Association, Inc. Jun 2004
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