Inside vs. Outside
Where will your next CEO come from?
When faced with the task of replacing a CEO, search committees often have their biases as to internal and external candidates. But credit union consultants who do this for a living suggest the best option is to consider both.
Limiting your search to only one option limits the likelihood of selecting a CEO with the right combination of skills and vision to lead your credit union into the future. While it’s important to give credit to internal executives’ contributions by inviting them to apply, it’s just as important to test their qualifications against outside applicants on a level playing field.
Nearly half (47%) of credit union search committees first consider internal applicants when replacing the CEO, compared with the 41% that pursue internal and external applicants simultaneously, according to CUNA’s 2012-2013 Complete Credit Union Staff Salary Survey. Only 7% consider external applicants exclusively.
Financial performance, marketplace conditions, and internal candidates’ preparedness and availability all factor into this decision. But in most situations, combining internal and external searches can help credit unions find CEOs with the right mix of skills and vision.
♦ Conducting both internal and external searches can help CUs find CEOs with the right mix of skills, experience, and vision.
♦ About half of CUs consider internal CEO candidates first, while 41% pursue both internal and external applicants.
♦ Board focus: Hiring a new CEO is the most important decision your board will ever make.
“Ideally, you want to keep credit union morale high and show that you value employees and hire from within,” says Charles Shanley, vice president/executive search group director at John M. Floyd and Associates. “That’s a good strategy if you have the talent. The problem is, sometimes you don’t know if that internal talent is the best talent out there.”
Shanley joins with David Hilton, president/CEO of D. Hilton Associates, in advising credit unions to set clear criteria for the CEO’s replacement, create a pool of qualified internal and external applicants, and then focus on the strongest applicants through interviews that involve the full board.
The biggest advantage for internal candidates is the strong likelihood they’ll be a good fit with the culture while delivering proven capabilities, Shanley says (“Internal vs. external candidates,”
p. 23). But it can be more challenging for internal candidates to offer a fresh perspective.
“You might not get that true visionary as you would with someone who is an outsider,” Shanley says.
External candidates often face the challenge of learning and adapting to the credit union’s culture. The most common reason for short tenures of CEOs recruited from the outside is the failure of their families to feel comfortable in their new homes, Hilton says.
Credit unions with shaky financials or other challenges will be more likely to look outside for a fresh vision and a new direction even if they have qualified internal candidates.
Cost-conscious boards might prefer internal candidates to save money on search firms, relocation, and compensation. But that strategy can be penny-wise and pound-foolish if the new CEO fails to perform.
“This is the most important decision a board is ever going to make,” Hilton says. “Short-circuiting the search process is usually not in your credit union’s best interests.”
As the recession eases and the economy picks up, executives who have delayed retirement to rebuild their 401(k) plans are more likely to leave the workforce. That could boost the number of CEO vacancies at a time when the regulatory compliance burden, earnings pressures, and operating complexities demand seasoned professionals with proven leadership skills.
The supply of top CEO candidates is already tight, Hilton and Shanley say. That has prompted some credit unions to consider people outside the traditional CEO replacement pipeline of chief financial officers (CFO) and executive vice presidents (“Who’s qualified to replace the CEO?” p. 24).
NEXT: Seeking stability
The search process can ease the sense of uncertainty created by a CEO’s departure. Soon after the CEO of $308 million asset Del-One Federal Credit Union, Dover, Del., left in April 2010, several other senior executives also left for other employment opportunities, including the interim CEO.
The credit union’s board had already formed a four-member search committee that included an associate board member who was vice president of human resources at a large company. The board also hired D. Hilton Associates
to do some of the “heavy lifting,” says Nancy Shevock, Del-One Federal’s board chairman. This eased the burden on the credit union’s board.
The search firm’s first task was finding a long-term interim CEO and an interim CFO. The credit union’s search committee wanted an experienced interim CEO who understood the credit union community and NCUA requirements, and who could work closely with the board, Shevock says.
D. Hilton helped the board:
► Establish criteria for hiring the next CEO;
► Maintain confidentiality; and
► Keep the process moving forward.
Both internal and external candidates were welcome to apply. Ultimately, the board interviewed five candidates, all from outside the credit union.
Consider these Best Practices for CEO Hiring
♦ Consider retaining a search firm to provide expertise, maintain confidentiality, move the process forward, and avoid overburdening volunteers.
♦ Have all applicants—internal and external—submit information directly to the search firm to provide a level playing field.
♦ Tap human resource expertise that could exist on your board.
♦ Keep personal relationships out of the process.
♦ Include all board members in interviews with leading applicants.
♦ Perform a thorough audit at the end of the departing CEO’s tenure. This will equip the incoming CEO with invaluable information about financials and the credit union’s adherence to procedures.
♦ Remain available to the new CEO to answer questions and offer guidance.
♦ Introduce the CEO to the community through personal contacts and community groups.
♦ Examine compensation to avoid losing talented executives, including retention incentives to reward valued executives who stick around.
The board rated the candidates based on its predefined criteria and winnowed the list to two finalists. The finalists made presentations about their plans for their first six months if they were hired as CEO.
The board hired Dion Williams as president/CEO in January 2011. Under his leadership, Del-One Federal has updated its policies and procedures, revised board bylaws, introduced new products, and helped employees transition to a new management team.
Board members helped Williams become established by making community introductions and including him in local and statewide events.
So far so good: Net income grew from negative $1.04 million at year-end 2010 to $1.7 million at year-end 2011.
“Our assets have grown from $260 million to more than $300 million because Dion and his management team have listened to our members and implemented programs that serve our community,” Shevock says.
Search for the best
Credit unions with strong internal candidates can be tempted to move forward without a search. But the board at $263 million asset Decatur (Ill.) Earthmover Credit Union wanted to know it was hiring the best CEO available.
In April 2007, the credit union’s CEO announced that he planned to retire in January 2009, recalls David D. Wilhour, a Decatur Earthmover board member for almost 40 years and a retired human resource manager for Caterpillar. The board knew there were at least two strong internal candidates.
The board’s search committee selected John M. Floyd & Associates to conduct an open CEO search that examined external and internal applicants side-by-side. Meanwhile, committee members met with the credit union’s executives and managers to explain the process and encourage qualified applicants to apply.
“You have to be up front and honest with people who have worked for you,” says Wilhour, a member of the board’s search committee.
Six applicants, including the two top internal candidates, were selected for interviews. The board used a numerical formula to rate each candidate.
Although only a few points separated the candidates, the highest score went to Executive Vice President Barry Schmidt, who became the credit union’s CEO in January 2009.
“The process showed us that our internal people measured up to the applicants that were available on the outside,” Wilhour says. It also convinced the board of the need to protect its relationship with the CEO and other executives who have skills coveted by other credit unions looking for senior leadership.
Decatur Earthmover increases its odds of retention with a five-year contract that delivers financial rewards if the CEO or senior executive remains at the credit union for the full length of the contract.
“You have to take care of your employees because there are plenty of opportunities out there,” Wilhour says, “and there’s not an abundance of qualified managers.”
NEXT: An external hire
An external hire
Every CEO search is driven by the credit union’s unique circumstances at the time of the search, says Brad Hines, board chairman at $1.5 billion asset GTE Federal Credit Union, Tampa, Fla.
When GTE Federal started its CEO search in early 2010, the credit union had experienced negative changes in net worth, market share, loans, and assets due to the recession.
Hines says the credit union had a qualified internal candidate, but board members wanted a broader search to find the best leader possible.
“We were coming off a pretty bad year and needed to get somebody in that could help us right the ship,” he says.
♦ CUNA: cuna.org/research, select“reports” and “compensation research.”
1. 2012-2013 CEO Total Compensation
2. 2012-2013 Complete CU Staff Salary
3. 2012-2013 Guide to Setting Salaries
Hiring a search firm was crucial to finding qualified candidates and structuring compensation to make a competitive offer for top talent.
The board selected Joe Brancucci as its new CEO from a group of finalists who were all current credit union leaders at either the executive vice president or CEO level.
From the beginning, the board supported Brancucci with information and advice aimed at creating a new culture that emphasized close member relationships, positive member experiences, and a healthy and respectful workplace.
“We didn’t help him adapt to the culture, we helped him transform the culture,” Hines says.
GTE Federal lost $44 million in 2009. In December 2011—18 months after Brancucci was hired—the credit union’s net income rose to $3.9 million.
“All our numbers are positive now,” Hines says. “More importantly, we are stronger financially and our members are recognizing that we bring value to them and that their membership in GTE Federal is worth something. It has energized the credit union.”
These credit unions emphasized the importance of finding ways to reward and retain existing talent—including internal candidates who are disappointed after not being named CEO. They use succession plans to identify and groom future leadership prospects.
Credit unions can also take advantage of conferences and other networking opportunities to identify talent outside their ranks, learn about other credit unions’ experiences with search firms, and monitor the marketplace for executive talent.
“You always want to project out to see who’s available now and who might be available in a few years—internally and externally—so you have as many options available to you as possible,” Hines says.
Doing so could ease your board’s next search for CEO talent.