By Mark Oppenheim
Part 1 compares and contrasts the environment for succession planning in nonprofits and businesses.
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Nonprofit board members and CEOs commonly raise succession planning as a key concern. A central role of any nonprofit board and CEO is managing risk to the nonprofit they steward on behalf of their community. When a chief executive or key leader exits an organization, there is loss of continuity, knowledge, management skill and subject matter expertise.
Succession Planning & Management is the process of reducing risk to organizations during leadership transitions, and having a sophisticated understanding of how to ease and speed transitions during such times can be a matter of survival for nonprofits and businesses alike.
Nonprofit boards have a particular challenge. The base knowledge of how to orchestrate leadership transitions will be different for various board members, because those members are likely to themselves come from different professional and community connected backgrounds. Contrasted with boards for businesses, nonprofit board members are often drawn from completely different business and nonprofit sectors, and from churches, academia and diverse professions (lawyers, doctors, accountants); and from government service, the military, philanthropic families and institutions and from the political world. Such members will have completely different succession planning perspectives, and not all approaches that board members have leaned through their different experiences will work at a particular nonprofit. And regardless of profession, most board members and most CEOs have limited exposure to succession-planning-as-a-discipline, even within their own fields.
m/Oppenheim Executive Search annually interacts with over 10,000 nonprofit board members and executives with different backgrounds as we successfully complete searches, interview leaders for our webcasts on nonprofits, and provide support to nonprofits as unpaid advisors. Additionally, we annually interact with over 100,000 people in our more extended network. Since the nonprofit boards and CEOs we serve and the candidates we recruit come from varied backgrounds, part of our job is helping these professionals navigate succession in a way that fits that particular nonprofit’s environment. We provide information on options and tradeoffs, and our clients decide on approaches that work for them.
This is a complex topic, but as this series of articles unfolds there will be useful information on some of the intelligence we routinely provide to guide boards and chief executives on succession planning and transition management options.
What is Succession Planning?
“Succession planning” refers to tactics, practices, training, risk hedging strategies, policies, org design and overhead management approaches that enable an organization to quickly replace leaders that occupy key roles when such leaders exit an organization.
In both businesses and nonprofits, succession planning focuses on quickly replacing KEY Executives responsible for mission-critical functions and KEY Board Members, particularly those serving on the Board’s Executive Committee. Less frequently succession planning can also include managers of particular departments and operating units, or board members who serve outside of the Executive Committee.
What Drives and Funds Succession?
Business and nonprofit succession planning processes are each driven by fundamentally different considerations. This comparative analysis will focus on business and nonprofit environments, but we can also later compare succession in government, academia, politics, churches, professional services and other settings.
Business succession planning is primarily driven by a harm-to-quarterly-profit calculus or, put another way, by a profit-maximizing calculus. Where damage to quarterly profits from a personnel change is likely to be high, there are likely to be strong succession plans. The position in question might be a CEO, a top-line sales position, a bottom-line finance role, or a manufacturing or services management role. It isn’t function that determines whether succession plans are in place; it’s impact of that role on profitability. If failure to fill a particular role quickly will significantly impact quarterly profits, then the likelihood is high that a robust succession plan will be in place.
Funding for succession plans (and funding to constantly prep potential successors) is drawn from the profits attached to the role in question. In this sense, succession planning is a hedge on a particular foreseeable risk that may affect profitability.
Since profit often depends on preserving trade secrets, business entities will generally ensure that mission-critical people have backup from within the organization (staff or board) if possible. Outside contractors or management professionals – people who are technically competent but who have no relationship or loyalty to the business – are rarely positioned as key elements of before-the-fact succession planning for a business. This avoids the significant risk that trade secrets connected to profitability are shared outside of the business by disloyal or indiscreet outsiders. When outsiders are recruited, offers include protection of trade secrets and such protections are advanced by a network of reinforcing laws.
Nonprofit succession planning is primarily driven by the need to avoid harm to the nonprofit’s mission, harm to the nonprofit’s constituents, and/or harm to the organization’s operating and financial infrastructure. The greater the potential harm to the nonprofit or its constituents, the more likely there is to be some sort of advanced planning to quickly fill a particular mission-critical role.
While funding for succession planning in a business can be drawn from quarterly profits, in nonprofits, there is no such ability because there are no profits. This means that the organization must have reserves set aside (or must receive grants from donors) to fund succession processes that include interim solutions, recruiting and transition. Reserves should adjust based on a board’s or CEO’s assessment of risk. The higher the risk of a transition, the greater the reserves should be so that succession costs can be funded.
Use of outside contractors or management professionals, including as interim management talent, can be an important element of a nonprofit’s before-the-fact succession plan. Nonprofits rarely have significant trade secrets to preserve (there are exceptions), and temporary or on-going use of highly competent outsiders to ease succession can come with certain tactical and cross-fertilizing benefits for nonprofits.
What About Succession Planning for Boards?
Succession planning for Governance Boards of business and nonprofit entities each have sector-distinct considerations that affect the kinds of succession approaches that can be undertaken, and other sectors (government, politics, military, medical, legal) each have their own unique succession challenges.
The Governance Board of a Business makes decisions as a fiduciary on behalf of the company and its shareholders. Most such boards are required to focus on financial health and on maximizing profitability for investors and owners. Certain boards of businesses have added Environmental, Social and Governance (ESG) considerations to “profit” and “shareholder value” as a guide to their decision-making, but there has been very strong push-back from investors, including in the form of lawsuits, and the ESG movement has not yet had a widespread impact on business succession processes.
In any event, board seats are generally occupied by those with a material interest in the financial health and profitability of a business – owners, shareholders, other investors and even business partners. Other board seats can be occupied by people with competencies and connections that in some way help to safeguard business health and help that business maximize profits. Succession generally is guided by profit maximization concerns, and issues of risk avoidance in order to maximize profitability and long-term financial health.
Members of business boards can be paid to contribute their time and expertise, and it can be a lucrative gig. According to a study by Lodestone Global, the median compensation for private company board members was $44,850, and according to executive compensation consulting service Veritas, average board compensation for the S&P500 in 2018 was $304,856. The ability to fund a board’s succession, and to provide financial incentives for board membership, powers board succession approaches for businesses.
The Governance Board of a Nonprofit focuses on advancing the organization’s public benefit mission while preserving its financial stability. While financial strength of a nonprofit is a key consideration, such strength is not for the sake of profit but rather as a way to advance a mission of service to civil society and to constituents. Nonprofits can be viewed as having adopted the most extreme version of ESG in that the organization’s entire focus is on social impact and not on delivering maximum profit to individual and institutional investors.
In consequence, a fundamentally different mindset is required of nonprofit board members when recruiting successor board members. Fulfilling the objectives of a nonprofit can involve a very complicated balancing act, because nonprofit constituents (people served or supported, funders, oversight agencies, partners) can have extraordinarily disparate interests. Success metrics can be complicated, and there is often a high level of different risks that need to be closely managed by a group with a very broad range of competencies, interests and networks. To advance a nonprofit and manage varied risks to its integrity, operations, financial strength, programs and community impact, the board’s members must bring to the table a huge range of skills, lived experiences and other attributes. As serving board members exit a nonprofit and take their particular attributes and networks with them, it can be extraordinarily challenging to recruit a group of members who together balance the governance team.
Nonprofit boards are not generally compensated, and most states have very strict laws governing nonprofits that prohibit such compensation or any other kind of financial benefit derived from serving on a nonprofit board. Indeed, nonprofit board membership usually requires annual contributions (time and/or money) from board members. In nonprofits, board transitions cannot be funded in any way that materially benefits the new board member, and the search for such board members is constrained by the requirement that they give rather than be compensated. This creates certain unique challenges for board succession at nonprofits. It also tends to eliminate those unable to afford contributions of time or treasure. In other words, those who are served by and benefit from nonprofits may not have a voice in nonprofit governance.
Part 2 will discuss tactics, practices, training, org design and overhead management approaches that enable an organization to minimize risk and evolve the nonprofit when replacing exiting leaders.
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