Stepping Up: a Study of CEO Succession and Strategy Formation in the Nonprofit Sector a quantitative study, MPPM Doctoral Candidate, Teachers College, Columbia University EXECUTIVE SUMMARY A study was conducted from 2013-2015 to explore the use of strategic planning following executive succession (executive director or chief executive officer turnover) in community- based nonprofit organizations in NYC. The study hypothesized two main relationships between strategic planning and performance: 1. Planning has a positive impact on financial health, within three years of succession; and 2. Planning has a positive impact on the successors job satisfaction and intentions to remain in the ED/CEO role. There was evidence to support both hypotheses. In addition several patterns were revealed about the ways in which executives engaged their stakeholders in planning, the types of strategic priorities that emerged, the types of organizational change that ensued, and sources of satisfaction for successor CEOs. Inspiration for the Study The study was conducted for a doctoral dissertation, inspired by the author s 20- year career as a provider of professional development to nonprofit executives, and a recent period of high ED/CEO turnover (early- mid 2000s). This turnover prompted widespread concern about organizational stability during and after leadership transition, a typically shaky period characterized by loss of funding, staff turnover, and associated reduction in scope or quality of service to clients. The author had observed that new executives are especially receptive to training in strategic planning, and so sought to test the relationship between planning and performance among successors as a means to promote stability. Research Questions Given that an estimated two- fifths of successor CEOs exit voluntarily or involuntarily within the first years of their tenure, the study focused on those who lasted beyond the transition phase. Was strategic planning conducted in the first two years? If so, were these organizations more stable than those that did not plan, measured in terms of financial health and CEO job satisfaction and retention? Did use of formal strategic planning committees increase the extent of planning and stakeholder involvement? What kinds of strategic priorities incremental vs. substantial change accounted for the greatest change in financial performance? What types of organizational change occurred? To what factors do participating CEOs attribute their satisfaction and dissatisfaction during transition? Study Participants The participants are, or were recently, EDs/CEOs of community- based nonprofit organizations in NYC, in the chief executive position from 3-10 years (an average of 6 years). Organizations are Human Services providers with budgets between $1.1 million and $245 million (46% have budgets between $1 and $5 million, the rest over $5 million). Candidates were identified through the grantee/membership lists of 24 philanthropic foundations, federations or associations diverse in their geographic reach and programmatic focus. Of 115 CEOs invited to participate, 73 responded and 68 met the study s criteria.
Of these 68, 39 entered their positions between 2008 and 2011 (post- economic downturn). In all, 48% were male and 52% female, ranging in age from 34-70 with an average age of 54. Their educational attainment was generally high, with 50 Master s degrees, 7 doctorates, 5 law degrees, and several Bachelor s or Associate degrees (highest level attained). The sample was less diverse in racial and ethnic terms than expected with 71% White (non- Hispanic), 13% Latino/a or Hispanic, 12% Black or African- American and 4% Asian or Asian- American or Eurasian. The vast majority (88%) were hired from outside the organization. Most (74%) succeeded predecessors who exited voluntarily, and nearly a third (31%) followed an interim ED. Methodology Participants completed an online survey about their engagement in 10 strategic planning activities, the involvement of board members and other stakeholders, the strategic priorities that emerged from the plan, and job satisfaction and intentions at the end of the second year and presently. (See Appendix.) Financial measures of performance allowed for comparison across organizations of different types, with data drawn from IRS Form 990s. (Social impact data, by contrast, would have been difficult to obtain and compare.) A standard measure of financial health, the profitability ratio calculated as total revenue over total expense - indicates how well the organization can meet its expenses, with some margin for reserves and/or infrastructure investment. A baseline measure was taken by averaging the predecessor s last full year and the transition year s profitability (the predecessor s performance); a second measure was taken by averaging the successor s second and third years profitability (the successor s performance). These two measures were used to calculate the percent change in profitability for the organization over a five- year period. All other data were drawn from survey responses, including participants numerical ratings and comments. Statistical analyses include descriptive statistics, 2- sample t tests, linear regression, and best subsets analysis. Tests were performed on the full data set (N=68, 50 planners and 18 non- planners) and a reduced set of CEOs who entered in 2008-2011 (n=39, 31 planners and 8 non- planners) to control for the effects of the economic downturn. Findings are generalizable to proximally similar organizations. Hypotheses and Findings* 1. Strategic planning early in the CEOs tenure is positively associated with organizational performance measured in terms of financial performance. Planning is positively associated with financial performance. In the post- 2008 sample the average percent change in profitability for planners was an increase of 6.18%. For non- planners it was a decrease of 5.94%. There was a 12% difference in percent change in financial performance, when controlling for the global downturn. (The difference found in the full sample was 9%, where cases span the downturn, with lower significance, p=.06.) This finding pertains to the occurrence of strategic planning yes or no. The extent of engagement in each of 10 planning activities was not associated with a change in financial performance. - - - - - - - - - - - - - - - - - - - - - * All statistical test results reported are significant (p<.05), except where noted. 2
2. Strategic planning early in the CEOs tenure is positively associated with job satisfaction and retention. The extent of engagement in planning is positively associated with job satisfaction at the end of Year 2, meaning the more extensively the organizations engaged in specific planning activities, the more satisfied participants reported being at the end of Year 2. The activity Identified a set of broad goals and measurable objectives was most significant in the full sample. The extent of engagement in planning is positively associated with the intention to seek a future ED/CEO position, specifically Assessed competitors offerings and Articulated a vision of success in the full sample, and Selected and documented a strategy and Identified critical issues in the post- 2008 sample. Participants in the study, both planners and non- planners, were generally satisfied with their jobs. They attributed their satisfaction to a broad array of factors including identification with the mission or program model, capabilities and support of the board and/or staff, organizational success and/or progress with the plan, pleasure derived from work the challenge, learning and growth in their jobs, and the ability to set strategic direction. Dissatisfaction, reported to far less extent overall, was attributed to difficult relationships with the board and/or staff, financial problems, painful transitions (including former CEO on the board) and challenges unrelated to the strategic plan (i.e., capital projects). Job satisfaction was positively associated with age, meaning that the older the participants, the greater extent of agreement they expressed with statements about job satisfaction, in the post- 2008 sample. Those whose tenure bridged the economic downturn varied more on this measure, which may reflect the hardships many organizations endured during this period. 3. Structured board involvement with planning positively influences the relationship between planning and performance. The stakeholder groups reported as involved in strategic planning to the greatest extent were CEO and board chair. The groups involved to the next greatest extent (somewhat to a great extent) were the senior team, a subset of the senior team, and a subset of the board. The extent of planning was somewhat greater for planners who used a strategic planning committee for several activities, including Clarified mission, Selected and documented a strategy, Identified broad goals and measurable objectives, and Created an action plan all statistically significant. Nearly half (48%) of the planners used a formal committee structure for planning. Over half (56%) used professional assistance to plan, such as a consultant, consulting firm, or nonprofit management assistance provider. Those who use formal planning committees reported somewhat greater engagement (than non- users of such committees) of two stakeholder groups: a subset of board and board chair. While funder involvement is associated with increased financial performance in the post- 2008 sample, planners on average reported engaging funders in planning to only a small extent. Funders attribute this to a sense of risk among grantees about revealing weaknesses, and among funders about having disproportionate influence in decision- making. 3
Best subsets analysis yields a set of seven variables that taken together best explains the variation in financial performance over the five- year period analyzed. An asterisk * indicates factors associated with increased financial performance as of the successors Year 3. o Articulated a vision of success* o Engaged board chair* o Engaged senior managers* o Used consultant or consulting firm o Used non- profit management assistance o Assessed internal strengths and weaknesses o Identified goals and objectives 4. Strategic priorities that emerge from planning, i.e., incremental change vs. strategic reorientation, influence the relationship between planning and performance. Two types of strategic priorities, one incremental and one reorienting, have a statistically significant, positive association with financial performance: Improved efficiency of existing services and Change in the organization s structure. Both had similar impacts on financial performance, with increases of 5% and 6% respectively. Best subsets analysis yields a 7- variable model positively associated with financial performance. These variables taken together account for a third of the variation in financial performance among planners in the post- 2008 sample. Four variables are associated with improved performance (*) as of the successors Year 3. o Formal strategy development committee* o Addition of a new service or services (strategic reorientation)* o Change in the organization s structure (strategic reorientation)* o Improve efficiency of existing service delivery (incremental change)* o Elimination of a service or services (strategic reorientation) o Change in the population to be served (strategic reorientation) o Change in staff number and type (strategic reorientation) Participants reported a wide array of organizational changes that resulted from planning. Most frequently reported changes include: o Expanded scope of services o Original strategic plan goals met; subsequent plans developed o Improved, standardized, and/or integrated service model o Increased and/or diversified revenues o Improved fiscal health and/or financial management o Increased staff development and/or human resource infrastructure o Expanded/strengthened partnerships, coalition- building o Improved communications and branding o Divested programs or lines of business, reduced staff as a result o Improved or improving facilities (incl. capital campaign in progress) o Improved capacity for evaluation, data analysis and tracking 4
Supplemental Findings Tested alone, neither successor origin (those hired from the outside vs. internal promotion), predecessor exit (voluntary or involuntary), succeeded a founder, or followed an interim executive director are associated with an increase in financial performance. However, several statistically significant differences in practice are associated with three of these attributes. Successors hired from outside the organization (vs. internal promotion) reported somewhat greater use of three planning activities: in the full sample, Assessed the internal environment to identify strengths and weaknesses and Identified critical issues the organization must address in order to succeed ; and in the post- 2008 sample, Articulated a vision of success. This may reflect the outsiders greater need, or clearer mandate from the board, to take stock of the organization and its opportunities and threats, or perhaps a desire to make such information more explicit, and to differentiate their priorities from those of their predecessors. Outside successors reported engaging some stakeholder groups to a greater extent, specifically senior managers and middle managers (full sample). This finding suggests that outsiders drew more explicitly on knowledge and experience within the organization to develop strategy. Outside successors reported pursuing two types of strategic priorities to a far greater extent, Improve enrollment in existing programs (full sample) and Addition of a new service or services (post- 2008 sample) than insiders did, suggesting the possibility that outsiders were more oriented toward expanding both scope and reach than insiders were whether by choice or by mandate from the board. Successors who follow an Interim ED report somewhat lesser use of four planning activities: Assessed the external environment, Identified goals and objectives, Analyzed competitors offerings, and Created an action plan all four in the full sample and the latter two in the post- 2008 sample. This may suggest that some assessment or planning occurred prior to the successor s arrival, raising the question of whether boards that hire an interim are also more inclined to plan and/or more experienced with planning than boards that do not hire one. Successors who followed an involuntary exit reported engaging slightly more in two activities: Assessed the external environment and Assessed internal strengths and weaknesses. This association appeared in the post- 2008 sample only. While the difference is small, such successors appear interested in success factors that may have eluded their predecessors. Of the 24 participants who used formal strategic planning committees, the vast majority were outsiders (88%). A majority (75%) of committee- users followed voluntary exits and a large portion (29%) followed interim EDs. These findings suggest that outsiders valued the structure that planning committees provide, with inherent opportunities for explicit exploration of assumptions and intentional development of working relationships and knowledge sharing. CEOs who maximize collaboration during strategic planning may be better able to align stakeholders (promote buy- in) in advance of the implementation phase. 5
Summary of key themes: Strategic planning positively impacts financial performance. This positive impact promotes organizational stability during/after executive transition. Formal planning committees are associated with increased board involvement in planning. Planning that informs strategic change can yield financial returns early in a new CEO s tenure, a means of stabilization during and after executive transition. Successors hired from outside the organization engage in several planning practices to a greater extent: assessments of the internal and external environments, use of formal planning committees, broader stakeholder engagement, and priorities that expand scope and reach. A combination of specific strategic planning activities, stakeholder groups involved in planning and use of external planning assistance explain the largest share of variation in financial performance, and contributes to the organizational learning necessary for strategic renewal. Funder involvement in strategic planning positively impacts financial performance but is used to a limited extent. Organizations can engage funders in ways that mitigate the risks identified above, such as individual interviews conducted by strategic planning consultants. Successors derive satisfaction from: identification with mission; strong, supportive boards and staff; organizational success/growth; and learning/growth in their roles. Aspects of planning are positively associated with interest in remaining an ED in this job and beyond. Conclusion This study began with a wish to identify practices to help stabilize community- based nonprofit organizations as they prepare for leadership transitions. A large and diverse group of foundation executives helped to identify candidates for the study, with a shared interest in the study s focus and its aspiration. A large and diverse group of CEOs diverse in terms of profession, age, tenure, organization size, and type of service took the time to respond and a number of practices were revealed. This study illustrates relationships between strategic planning and organizational performance and between the extent of planning and job satisfaction. It also explores aspects of the planning experience regarding stakeholder involvement, strategic priorities and organizational change and raises many questions for future study. It may also influence practice among those who lead, steward and support nonprofit organizations. All will experience leadership transitions at various times, and it is the author s sincere hope that these stakeholders will take the opportunity to step up and contribute to the strategic learning that is necessary to guide organizations through periods of loss or uncertainty to periods of renewed purpose and impact. After all, such stakeholders are the bridge between past and future, and are in a position to ensure continuity for these organizations and the communities they serve. 6
Appendix THE MODEL Control Variables Successor attributes (Origin, Identity) Organization attributes (Size, Transition post-2008) Independent variable: Strategic Planning Indicators Stakeholder engagement Mission statement review Contractual obligation review Environmental analysis Internal assessment Critical issue identification Vision and stretch goal Documentation of strategy Goals and objectives Action plan Moderator Variables: Dependent variables Planning Outcomes: Organizational Performance % Change in profitability from pre- to post-transition (5 yr span) CEO retention (Job satisfaction, Intention to remain in role) Stakeholder involvement: Board Involvement Formal Planning Committee Planning assistance Planning Outcomes: Strategic Priorities Incremental change Strategic reorientation STUDY MEASURES Indicators of Strategic Planning: 1. Clarified the organization s mission, defined as its purpose and explicit core values. 2. Clarified obligations imposed on the organization by existing contracts and legislation. 3. Assessed the external environment to identify opportunities and threats that the organization faces. 4. Analyzed competitors offerings to the stakeholders the organization serves. 5. Assessed the internal environment to identify strengths and weaknesses in the organization. 6. Identified critical issues that the organization must address in order to succeed. 7. Articulated a vision of success or challenging stretch goal that illustrates fulfillment of the mission. 8. Selected and documented a strategy that reflects the critical issues and/or vision. 9. Identified a set of broad goals with specific, measurable objectives for each goal, with which to monitor the strategy s progress. 10. Created an action plan for achievement of the strategy. Planning Outcomes: 1. Financial performance: percent change in profitability, using the profitability ratio with a baseline measure of Year 0 (transition year) and Year - 1 (the predecessor s final full year), and a second measure of the successor s Years 2 and 3. 2. Satisfaction at the end of year 2 3. Current intention to remain in the position 4. Current intention to seek a future ED position in the event you leave your present position 7
Strategic Planning Process: 1. Use of formal strategy development committee (yes/no). 2. Stakeholder involvement: board chair, subset of board, board as a whole, senior management team, subset of senior managers, mid- level managers, staff below middle managers, funders, consumers, partner organizations. 3. Use of formal planning assistance: consultant, nonprofit management assistance organization, board member as facilitator, none. Strategic Priorities: A. Incremental change: 1. Maintain existing scope of services and clientele 2. Improve quality of existing service delivery 3. Improve efficiency of existing service delivery 4. Improve enrollment in existing services B. Strategic Reorientation: 1. Refocused mission 2. Addition of a new service or services 3. Elimination of an existing service or services 4. Change in the population to be served 5. Change in the organization s structure 6. Change in the configuration of the senior team 7. Change in staff (number, type) RESEARCHER, MPPM (Ed.D. to be awarded in May, 2015) Principal Strategic Learning Associates, LLC www.strategiclearningassociates.com lori@strategiclearningassociates.com T: 917-287- 1419 8