Tricky Transitions

7 min read

Planning and Implementing Succession

The English royals seem to have succession down pat. It’s based on birthright, everyone knows who’s in line and the citizenry seems to respect it. And despite occasional disruption from wars and marriages, it seems to have worked pretty well for hundreds of years.

If only succession was so simple and specific in American business. Instead, there is no widely accepted formula or process. And so, an approach needs to be invented by each company to satisfy its unique needs and quirks. Figuring out the economics of succession, who is entitled to what, is complex enough. But perhaps more complicated is the human component.

In the tax credit driven development industry, a first generation of industry pioneers, many who built companies from scratch, is reaching the point where its members want to wind down and lessen their responsibilities. The companies they built generally include staff, frequently families, board members and investors who all have a stake in the business’s success. This success is affected by the company’s perception in the outside world and the marketplace.

A quirk of the tax credit driven development industry is that companies are generally committing upfront to 15 years of ownership of properties, and often much more. So Board participants and investors are going to want to see institutionalization. They are also going to want to know, as Howard Cohen says, what your bench looks like.

In its ongoing effort to provide new, needed information to membership, the National Housing & Rehabilitation Association presented a session on approaches to succession planning at its Summer Institute in Newport, Rhode Island this past July.

A good and clear succession plan is not just the method of managing the transition at a given time; it becomes an integral part of a company’s day-to-day business. “A succession plan informs the strategic plan and builds sustainability, engages the staff by providing clarity about future opportunities, and limits the risk of failure when hiring leaders from the outside,” says Stan Hannah of the Talent and Organization team at Plante Moran, a large Midwest certified public accounting firm headquartered in Chicago.

But when change takes place, can you maintain your corporate culture? Or is a culture tied to the personalities of leadership? And can you change leadership, and keep the key staff that does not rise to the top satisfied?

These are just some of the concerns to consider when formulating your company’s succession plan. Others include:

Who plans succession?
At an executive retreat in 2011, the Board of the Great Lakes Capital Fund headquartered in Lansing, Michigan gave its president Mark McDaniel one major goal for the following year: to develop a succession plan for his position. McDaniel had been with the company since its founding in 1993, during which time he raised and committed $2.95 billion in loans and equity for affordable housing and economic development to 635 projects encompassing 39,000 units in ten states. “This forced me to face, when am I going to retire,” said McDaniel, who was approaching 60 at the time. “I spent two months researching succession plans and realized this is going to require an investment of time beyond what I could realistically commit.”

So McDaniel turned to an outside advisor and eventually brought in Plante Moran’s team. Rather than just focus on the CEO position, the directive was to develop succession plans for all Great Lakes senior leadership positions. “The succession plan,” says McDaniel, “became a living, breathing document that articulates the behaviors and characteristics critical to the long-term success of the organization.”

Howard Cohen joined Beacon Communities in 1996, after, like so many of Boston’s affordable housing developers, working in the Dukakis Administration, and then practicing at the law firm of Mintz Cohen. He arrived at Beacon Communities accompanied by his colleague at Mintz Cohen, Pam Goodman. Cohen became CEO and Goodman Vice President, who oversaw all development, and together over 20 years they pivoted the company back and forth through the various markets as they shifted, doing new construction of affordable and mixed income rental and for-sale development, historical rehabilitation, Hope VI redevelopment of public housing, affordable housing preservation, acquisition of workplace housing and special needs housing. In all, they developed, preserved or purchased over 60 communities containing 12,000 apartments in seven states. When Cohen determined it was time to lessen his load, it may have been obvious who his successor would be: the colleague who had been with him from the get-go. Who else could have as deep and comprehensive an understanding of the company’s experience and culture?

And yet Beacon Communities approached succession planning with the same attention to detail and sensitivity to colleagues with which they financed and developed their real estate, devoting three years to devising a plan before the transition began. “We viewed this as a process,” says Goodman. “There is always going to be some conflict and you have to work it out. You don’t want to step on each other’s toes. You want to merge your skills for the organization’s benefit.”

The process of assessing leadership
Stan Hannah provided Great Lakes with an outline of a five-step process for succession planning:

  1. Identify key business challenges and evaluate the health and sustainability of the organization;
  2. Create a leadership success profile that prioritizes key behaviors;
  3. Facilitate dialogue with the board and address tough questions about the organizational transition;
  4. Select individuals who demonstrate key competencies and leadership potential;
  5. Develop talent plans based on key transition issues related to the business.

As a successful company, Great Lakes Capital was determined to maintain the corporate culture that evolved under McDaniel’s leadership even after the transition. But to do so, it needed to define that corporate culture, to make sure the staff shared a vision. And to maintain stability and morale, the process needed to be inclusionary.

Everyone involved needed to feel ownership. “We spent a lot of time interviewing our staff and our management,” McDaniel says. “We asked everyone to define the culture and assess the company, to compile a list of characteristics for future leaders. Then we assessed the company. We asked ourselves: ‘Who is ready? Who needs training? Can we further educate those who need it?’”

The process of evaluation
Like most companies, Beacon Communities was organized around its own unique financial structure. This structure, a limited liability corporation, raised start-up funding from senior executives and a handful of outside investors. When it became time to plan transition, the company developed a valuation formula that included evaluating the underlying real estate, the management company and the development company. The value was frozen as of the designated transition date and the original group is entitled to priority payment. A determination was made of what percentage of money is attributable to frozen value and what percentage will be attributable to growth. Future growth is more widely shared and is entitled to growth payment. And in his new role as chair, Cohen’s share of the growth, for instance, was reduced from his share of the frozen financial values.

Communicating the transition
Even in the most fluidly operated companies, gossip can muddy the waters. If handled without sensitivity, succession can turn out to be a demoralizing staff event. And so how succession plans are communicated to both staff and the outside world needs to be a part of your planning.

Howard Cohen communicated Beacon Communities’ plan to its staff at its annual meeting. “But we didn’t make a big outsider announcement,” says Pam Goodman, the successor as CEO. “Our goal was to diminish anxiety within. We didn’t need to have a lot of outside people asking our staff questions and making them uncomfortable. We wanted this to just seem like part of our evolutionary process.”

Among actions chosen to maintain staff equilibrium—the “little things,” Goodman calls them—were moving Goodman into what had always been the executive office and relocating Cohen on the floor. Goodman also visited all 70 properties and met with every member of the staff.

Change is always difficult. Different people have different capacities for tolerating the new. But a well-planned, well-executed transition and a clear roadmap going forward can serve as encouragement to staff by helping to clarify the possibilities of the future and thus actually boost security, activity and morale. At future meetings, NH&RA plans to continue exploring different companies’ approaches to succession planning.