Almost one-third of credit unions have no idea who their next CEO will be.
Only about 60% of CUs have succession plans in place for their next leader, according to Scott Albraccio, a sales specialist manager for executive benefits at CUNA Mutual Group.
And that's just one issue when it comes to succession planning in the CU community.
Though most institutions have plans in place, many aren't detailed enough or focus on one or two people for an executive position, said Laura A. Hay, managing director and head of the national banking industry team at Pearl Meyer & Partners, an executive compensation consulting firm.
"An effective succession plan must go beyond designating someone to assume control if your CEO decides to leave or plans to retire," Albraccio said. "It should be a process that actively grooms top talent across the board and rewards their commitment to the credit union. It's clear that credit unions are facing some significant challenges around executive retention and long-term leadership strategies."
In the absence of succession plans, the sudden death or unexpected retirement of a CEO can lead to costly and time-consuming searches for a new chief executive. Indeed, using an executive search firm to find a new leader can often cost the equivalent of anywhere from 50% to as much as 250% of a CEO's annual salary.
"Those credit unions that do not have a succession strategy in place are going to struggle to find a new CEO," said Albraccio. "Especially now in an environment where CEOs must have multiple types of skills, including technology, compliance and social media. Credit unions that have a solid succession plan in place will fare much better."
Dennis Dollar, an Alabama-based consultant, said that almost all larger-asset credit unions have succession plans in place. These are typically executive continuity plans that designate which executives cover what duties when there is a vacancy for an extended period of time.
"This allows for cross-training of executive duties and helps develop the bench strength of the credit union executive ranks," Dollar said. "Credit unions are much more progressive on promoting cross-pollination of executive duties, preparing of budding managers with obvious potential and planning for inevitable executive vacancies than they once were. It is a sign of the maturing of the industry and the recognition that credit unions need to be able to recruit and retain the best and the brightest for their executive positions."
Along with a succession plan, Albraccio noted, it is important for CUs to nurture and mentor potential future CEOs among their crops of younger executives by encouraging such things as professional educational classes, cross-training in various aspects of the financial services industry, and other CEO development endeavors.
"This process may take three-to-five years, but in the end you will have a well-rounded individual ready to take over the top job in the corner office," Albraccio said.
Hay of Pearl Meyer said developing talent from within the credit union requires nurturing, mentoring and some patience.
Finding the Right Match
Once a credit union knows what qualities it wants the next leader to possess, it is helpful to determine if there are internal candidates that already have those skills or candidates where those skills could be developed, Hay noted.
"Three hundred and sixty-degree assessments and other testing can help a credit union get a baseline and often are not expensive," she said. "It also can serve as a roadmap in tailoring opportunities, training and other experiences to develop viable candidates and a strong management team."
She added that smaller organizations sometimes think that they aren't large enough to have a talent development initiative. But, according to Hay, "we have seen 'mindset' over the years be much more important that size."
Being intentional about developing talent, establishing a plan and providing honest feedback for top performers may be all that a credit union needs, she added.
Promote From Within
Hay said unless a CU is looking for a "culture shift" or a "financial turnaround," boards usually have a strong preference for internal candidates.
"Internal candidates already know the organization and its culture," she said. "Numerous studies show that CEOs that come from within often perform better than CEOs hired from the outside. The ultimate decision, however, comes down to whether the credit union has a viable internal candidate and grooming an individual for the top spot means having a process in place to develop future leaders."
Hiring an external CEO, Hay noted, might be a sign that the institution did not do a good job in managing performance and planning for the future needs of the organization.
Jim Blaine, the CEO of $29 billion State Employees' CU, in Raleigh, N.C., is also a big believer in promoting from within. But he is not averse to letting top people go if they are attracted to greener pastures at other institutions.
In fact, Blaine estimates that some 25 credit unions around the nation — including the $6 billion Suncoast FCU of Tampa, Fla.; $5.3 billion Vystar FCU of Jacksonville, Fla.; and $1.5 billion American Heritage FCU of Philadelphia, Pa. — now have CEOs that began their careers at SECU.
But Blaine adds a caveat regarding the promotion of CEOs from the inside: "Unless it's a troubled institution, a credit union should promote from within its own in-house talent; but if the institution is having problems, it is better to bring in someone from the outside."
Still, for a thriving credit union in good financial shape, hiring a new CEO from a pool of familiar in-house candidates can be crucial to continued strong performance and member satisfaction.
"Culture is very important to credit unions, given the nature of the business," Blaine noted. "After all, the membership, even at the largest institutions, has something in common with respect to demography or population. For example, the boss of Navy FCU should have some background in the U.S. Navy."
Albraccio said sometimes it is healthier to hire from outside the credit union — especially if the former CEO had been in place for an extended period of time. Indeed, the CU community has witnessed so many changes in recent years — including tighter regulations, increased compliance, consolidation and the rise of social media — that it is much different industry than it was just a decade ago.
"It might be better to find someone with new ideas, new vision, and seeking a new direction," Albraccio noted. "It might no longer make any sense to continue with the policies of the former CEO."
An increasing number of top CU executives have been recruited from the community bank industry.
"Most CEOs and C-level executives come from within the credit union ranks, although a growing number are coming from community banks," Dollar noted. "Community bank executives can adjust much easier to the credit union culture than can a banker from one of the larger national or regional banks, and so there is an easier transition for them than someone from Wells Fargo or Bank of America."
Another significant change in practice — looking at the entire CU executive pool—not just the C-suite. "In the past, it was usually the chief financial officer that would ascend to the top job," Albraccio said. "Now we are seeing boards hire the former chief marketing officer or even the former social media officer to CEO. There is a lot more versatility today in the skills, talents and abilities of credit union executives."
But what happens if an ambitious, highly-talented young executive gets passed over for the CEO spot, or doesn't want to wait around too long for the current CEO to retire?
One way to prevent such a departure, Albraccio suggested, would be to sign younger executives to employment contracts with the understating that they will remain with the company even if they don't land in the biggest corner office.
"The idea is to lock the executive into an employment agreement for X number of years," he said. "The employment contract would contain a deferred compensation plan that would pay them after the new CEO is named. The agreement should be for X number of years after the new CEO is named (based on the board's input as to how many years). If they left prior to the end date the executive would forfeit the deferred comp. This 'golden handcuff' (the deferred comp plan) would prevent them from departing to another institution. Deferred compensation would be forfeited should they leave prior to the expiry of their agreements."
Even the largest credit unions do both — promote from within and without — depending on their needs. One of the biggest credit unions, the $17.8 billion Pentagon Federal Credit Union of Alexandria, Va., recently hired a long-time insider James Schenck as president and CEO, succeeding Frank Pollack, who retired after more than 13 years.
But Boeing Employees Credit Union of Tukwila, Wash., made a surprise decision three years ago by hiring Benson Porter as president/CEO — plucking him from the $7.3 billion First Tech Federal Credit Union of Palo Alto, Calif., to succeed retiring CEO Gary Oakland.