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Non-Profit Management, A 10-step Proposal for Boards Engaged in Succession Planning

This article was previously published in the Rochester Business Journal on February 28, 2020.

The best way to predict your future is to create it.

--Abraham Lincoln.

Succession planning, particularly at the CEO level, can be challenging for any tax-exempt organization. Obviously, if there is a qualified internal candidate who has been groomed for the position of a retiring CEO, that represents the ideal scenario. However, the ideal scenario appears to be more the exception than the rule for many health and human service providers.

The objective of this article is to provide a structured 10-step approach to effective succession planning at the CEO level as well as other key Management positions. Succession planning is one of the top 10 responsibilities for each and every tax-exempt Board of Directors.

An effective approach and results to succession planning have been made more difficult by the following factors, among others:

  • The demographic impact of the “Baby Boom” generation, with 10,000 Boomers retiring on average each day through 2029. That is the year that the last of the Boomers, born in 1964, will reach age 65.
  • The generation following the Baby Boomers is fewer in number and, as a result, the number of CEO positions available far exceeds the pool of qualified CEO candidates.
  • Upstate New York State is losing population as those middle class and wealthy taxpayers seek lower tax states of residency and more desirable weather conditions.
  • There are more than 3,000 tax-exempt health and human service providers in New York State, each of which has a CEO or Executive Director position.

There are many other factors that challenge a Board of Directors in a CEO search process. Following the 10-step approach described below has proven to be generally successful throughout my career.

1) Develop a Contract or Letter Agreement with the Current CEO – In my early days of practice, a letter agreement specifying a compensation arrangement was generally sufficient. For the past 20 years, I have recommended a contract, with legal counsel review and input, as being preferred. A contract establishes the necessary baseline of both CEO and Board expectations.

2) CEO Goals and Objectives – The contract should specify that the CEO will provide, in writing, annual goals, and objectives subject to Board review and approval.

3) Incentive-Based Performance Compensation – Based on the annual review and assessment of the goals and objectives, I believe that a component of CEO compensation should be based on achieving the agreed-upon CEO goals and objectives. The percentage of incentive compensation to total compensation can generally range from 5 to 20%.

4) Enhanced Fringe Benefit Offerings – Many CEO compensation arrangements may include enhanced fringe benefits that are not generally offered to the organization’s employees. The Board must determine whether the cost of these enhanced fringe benefits will be allowable expenses under the various reimbursement regulations of government funding sources. Enhanced fringe benefits, although non-allowable, can be provided as long as the organization’s cost reports properly reflect those costs that are deemed unallowable by the funding sources.

5) Notice of Retirement Date – The CEO’s contract, subject to legal review and approval, should have a notice provision by which the CEO must inform the Board Chair of his/her intention to retire. Notice provisions, depending on facts and circumstances, can range from 6 to 18 months. For longer notice provisions, it is important that the CEO not be prematurely placed in a “lame duck” position.

The preceding steps are contractual in nature. The following steps are procedures that, if followed, can result in a smooth and effective CEO transition process.

6) Management Team Coaching and Leadership Development – I believe the best approach to CEO transition is a standard policy of coaching and leadership development provided to Management team members. These processes can be implemented well in advance of the expected CEO transition. There are many effective coaching/leadership development consultants available to provide these services. In addition, many universities offer Certificate Programs specifically designed for the development of an individual’s necessary skill set for CEO leadership.

7) Internal Promotion vs. External Search – If an internal candidate has been identified and has developed the necessary skill set, there may be no need to look outside the organization for other CEO candidates. However, I do recognize that it is, at times, important for the internal candidate to be vetted in comparison to external candidates who may apply through an external search and recruitment process.

8) Establishing a Search Committee and Targeted Recruitment – Since the selection of the CEO is a Board responsibility, I believe that a Board Search Committee including Board Officers and certain Committee Chairs provides the appropriate structure for completing an effective search process. External recruitment processes can represent an organizational cost that may or may not be affordable. Accordingly, a cost-effective alternative to full recruitment is known as “targeted recruitment.” In targeted recruitment, typically the Board and the current CEO identify qualified candidates who are working or have worked for other organizations. Each of the agreed upon individuals are contacted by a member of the Board Search Committee to determine whether the individual is open to applying for the CEO position.

9) Current CEO Involvement in Recruitment – I believe the current CEO and, if appropriate, Management team members should be surveyed by the Board Search Committee. The specific objective of the survey will be to obtain input from current Management team members with respect to those performance attributes and management styles that are most desirable. These desirable performance attributes should be compared to the organization’s Strategic Plan and its specific Goals and Objectives. This will facilitate the identification and recruitment of a new CEO who has demonstrated skills and competencies best suited for fulfillment and alignment with the organization’s Mission and Vision.

10) Annual Board Responsibilities – Each tax-exempt Board has regulatory compliance provisions as a result of the Nonprofit Revitalization Act and the Internal Revenue Service Form 990 requirements. Fundamental to compliance with these requirements is an organized and disciplined approach to a documented annual performance evaluation of the CEO. The Board Executive Committee, Board Officers, or a Board Compensation Committee can be assigned responsibility for evaluating the CEO and providing the necessary feedback with respect to CEO goals and objectives. This process should include a retrospective evaluation and prospective consensus with respect to the CEO’s past and future performance. This process can also include consensus regarding the incentive compensation component for the CEO.

Every Board member should be aware that New York State Government funding sources have made it quite clear that the number of individual tax-exempt human service providers needs to be reduced. The primary factors driving the State’s expectation of more efficiency and reduced duplication of effort are:

  • Embracing the advantages available through technology sophistication – for example, a calculator I purchased in 1973 cost $300, and the same functionality can be purchased today for $50.
  • Addressing the recognized limitation of qualified CEO candidates through mergers and affiliations of individual provider organizations, resulting in cost reductions.
  • The fact that every for-profit industry in the USA has experienced extensive consolidation over the past two decades.

My personal opinion is that what is now viewed as a voluntary recommendation in favor of mergers/affiliations will become a mandate as a result of government funders establishing new requirements that will disqualify many smaller organizations from the ability to continue providing services. Government funders have the power and authority to either cancel or choose non-renewal of service contracts based on their assessment of quality outcomes and/or cost efficiencies of individual providers.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.