An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage. – Jack Welch
One of the Top 10 governance responsibilities for a nonprofit Board is the identification and selection of the Chief Executive Officer (CEO) who leads the organization. In addition to selecting the CEO, the Board also has the responsibility to perform an annual performance evaluation of the CEO, which must be formally documented.
Seventeen million baby boomers born between 1946 and 1964 are now retiring at the average rate of 10,000 per day for the next 15 years! This demographic tsunami has resulted in a critical void in nonprofit leadership, particularly at the CEO level, but also with regard to recruitment and retention of Board leaders. The resulting effect is that every nonprofit organization must have a succession plan for both CEO and Board leadership. The focus of this column is on CEO succession planning. However, many of the recommendations included here can be easily applied to Board leadership as well.
After nearly four decades of specializing in nonprofit organizations, I have developed a three-legged stool metaphor that is universally applicable to all tax-exempt organizations. We all know what happens when one leg of a three-legged stool is weak or non-existent. The first step in succession planning should be a self-assessment of your current organization with respect to the strength of the following three legs of the stool:
- Management and Board leadership
- Fiscal strength, sustainability, and access to private sector fundraising
- Cost-effective, high quality services in fulfillment of the mission
In this decade of nonprofit consolidation, affiliation, and merger, the three attributes described above have consistently produced successful organizations that are able to maintain some form of local control and autonomy.
There is no question that effective, energetic, and enthusiastic leadership is of significant value to the successful tax-exempt organization. Therefore, with another variation of my now ubiquitous Top 10 Lists, I offer the following advice regarding an effective CEO succession planning process.
- When should the planning process start? – The best time to begin a succession planning process is years in advance of the actual need to replace the CEO. That is, every organization should have a documented succession planning process that can be tailored and modified when a CEO search / replacement process is necessary. I suggest that using the following nine suggestions will put you well on your way to a successful and formally documented succession planning process.
- Is the CEO retiring or being replaced for lack of performance? – The process to follow is similar in either case. However, CEO retirement should be made known to at least the Board Chair / Executive Committee 12-18 months in advance of the retirement date. CEO replacement for lack of performance will compress the timeline described below.
- Are there one or more qualified internal candidates? – This is a key question that should be addressed by the full Board before final decisions are made with respect to the actual search process. It is important to recognize that qualified internal candidates must understand why the Board has decided to conduct an external search. The primary reason for this is that qualified internal candidates may take great exception to a Board’s decision to conduct a formal search process if the rationale is not adequately explained to the internal candidate(s). A search process should ideally never result in a qualified internal candidate seeking employment elsewhere before the search process begins.
- Who should be involved in the search process? – Most common and most successful, in my experience, is a Search Committee composed of Board leadership. This can be a Committee made up of Board leadership positions and certain Committee Chairs or, in many cases, the Executive Committee. What is most important is to have informed, confidential Board members involved in the search process while limiting the number of members to preferably less than 10.
- Is a search consultant / facilitator necessary? – This is a decision that must be made by the Search Committee with input from the full Board, if necessary. As with any professional consultant, interviewing and selecting the appropriate person is critical to a satisfactory result. Costs and related fees must be affordable and reasonable for the organization.
- What type of person does the Board want? – Using the current CEO job description and the most recent performance evaluations of the current CEO, the Search Committee should develop and recommend to the full Board the most desirable CEO skills and performance attributes that will influence the ultimate decision.
- Should the Search Committee / Board operate in isolation? – It depends. However, I strongly recommend that input from the current CEO, Management team members, program funders, and long-tenured former Board members is an important element of a successful search process.
- When should the search process be commenced? – In the case of a planned retirement, I believe the optimum time frame for beginning a search process that involves external candidates is 6-9 months before the planned CEO retirement date. This window of time allows for sufficient planning and execution of a successful search process. The question of whether overlap should occur between retiring and new CEO should always be addressed. The answer to the question depends on facts and circumstances. However, if overlap is considered desirable, it should be between 30 and 90 days.
- Who will be involved in vetting and interviewing CEO candidates? – Generally speaking, either the full Search Committee or, in my view, a sub-set of the Search Committee should be prepared to interview each candidate with a list of pre-determined questions to be asked of each and every candidate. Checking references for the final candidate(s) should be performed by either the Chair or a designated member of the Search Committee.
- What is the most effective process for finalizing compensation package and approval of the selected candidate? – I believe it is imperative to have either a letter of agreement or a contract with the CEO that formally documents all of the terms and conditions of the CEO’s employment. Agreement regarding compensation, fringe benefits, severance, involuntary termination, etc. should involve legal counsel.
The selection of a CEO is, without question, one of the most important responsibilities of sustaining a successful tax-exempt organization. If you follow the approach described above, there is a high probability that you will choose the right candidate. However, it is important to recognize that if the Board has made a mistake in selecting the wrong individual, no more than 12 months should pass before the mistake is acknowledged and a new CEO is recruited.
Always remember that the ability to acknowledge a mistake and take timely action to correct it is a vital component of success.
Gerald Archibald is a partner serving both of our Rochester, NY, and New York City offices.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.