Where Will Your Next CEO Come From?

Open search yields best candidates for CEO.

September 21, 2012

Asked to choose between promoting a new CEO from within or seeking for qualified outside candidates, credit union board members and consultants suggest the best answer can be captured in a single word: Both.

Limiting your search to only one avenue overlooks the importance of selecting a CEO with the right combination of skills and vision to lead the credit union into the future.

While it’s important to give credit to existing executives’ contributions by inviting them to apply, it’s equally valuable to test their qualifications against outside applicants on a level playing field.

Credit unions with strong internal CEO 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 resources 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 likely to be 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 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.”

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 resources expertise that exists 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.

Internal preference

Nationwide, 47% of credit union search committees first consider internal applicants for their next CEOs, compared to 41% who pursue applicants internally and externally simultaneously, according to CUNA’s 2012-2013 Complete Credit Union Staff Salary Survey Report. 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.

“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 position, 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 near-certainty they’ll fit well into the culture while delivering proven capabilities, Shanley says. 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.