A couple of days ago, I wrote about the recommendation from OPEN MINDS Circle reader, J. Kevin Fee, president of Angler West Consultants, that non-profit organizations should be thinking about “mergers” as a succession planning strategy (see Mergers As A Succession Planning Strategy). The piece drew some great comments from my colleagues here at OPEN MINDS.
One key perspective was that mergers should always be on the table as a strategic option – and not just for succession planning. The board and executive team should be discussing the organization’s sustainability and strategic goals on a regular basis, so that when the question of a merger comes up, they have a thorough understanding of the organization’s market position and all the options. Robert D. Cartia, M.B.A., M.A., LISAC, OPEN MINDS Senior Consultant & Former Chief Executive Officer, Spectrum Health Care explained, It seems to me that the CEO, as part of the corporation’s ongoing strategic planning process, would always consider a merger or acquisition in terms of an opportunity or threat. The point is that in today’s health care climate, it makes sense that the board would have mergers and acquisitions somewhere on their strategic radar. As difficult as it is, we have to do our best to educate and inform our boards about developments in our industry including mergers and acquisitions. Therefore, if there is a “planned” retirement of the CEO, the board is at least somewhat comfortable with the idea of a merger or acquisition opportunity as one (not “better”) option in the succession process.
When I discussed with the board my intent to retire, the board did not see a merger as a “better” direction than evaluating an internal candidate and spent no time entertaining that option. The primary reason was that our organization was in a financially sustainable position. If our organization was not financially healthy and growing as a health care provider, the succession plan may have differed, but I doubt it.
I think in today’s health care climate boards should consider whether a merger is one of a number of available options that makes sense for the company as part of the succession plan and within the context of their strategic initiatives and corporate health. In my opinion, the board of directors can only make that decision or be willing to entertain that decision, if they have had some level of discussion and education on strategic issues on a regular basis.
To make that happen, the CEO’s responsibility is to educate their board about the realities of the market – and that education process continues when talk of a merger comes into play. Understanding the complexities of a merger requires different competencies, something that not every board fully comprehends at the outset of a merger process. Howard Shiffman, M.A., OPEN MINDS Senior Associate & Former Chief Executive Officer, Griffith Centers for Children explained, I think it is absolutely essential in today’s marketplace that organizations include a merger as a possible option when their CEO retires. The key word here is “option.” All too often boards of directors do not think about merger as a strategy at this juncture of their organizational journey. This option however, must be embraced by a board that truly understands why this is a strategy worth pursuing. They must be educated about the realities of health care reform and understand the need to have competitive advantage and market positioning. They must also be savvy about the ways payers are changing reimbursement from pay for service to pay for performance. They must grasp the concept that sometime in the near future they will be asked to take on some financial risk and that having cash will be extremely important. And they must understand the competition that is emerging in their field as payers seek narrow networks to offer contacts to.
This being said, the question arises as to how to get boards of directors to understand the importance of merger as an optional succession plan? I believe that it is the responsibility of the present retiring executive to have educated his/her board to the realities of the changing marketplace and the elements and competencies needed to achieve sustainability in the future. If this has not been done, I doubt that nonprofit boards will readily opt to explore merger as an option for succession planning. For the board that has been educated, I think this is an obvious strategy and one they will want to explore.
My caution to boards of directors that want to explore merger as an option for succession planning is that they need to hire an outside expert to outline and guide the merger exploration and eventual activities that might culminate in a new merged entity. All too often boards of directors make a poor choice as to which organization they acquire or end up merging into. This merger exploration and activity requires its own set of competencies that often can only be found in a consultant with these skills.
Along with the need to understand all the strategic options available to an organization and the complexities of a merger, it is critical that boards recruit new executives that meet the future needs of the organization. The crucial question for all boards to ask is – “What kind of leader will we need?” George Braunstein, FACHE, M.S., OPEN MINDS Senior Associate & Former Executive Director, Fairfax-Falls Church Community Services Board (CSB) noted, As we know, succession planning has become increasingly important to both public and private organizations with this ever-changing business and service environment. I do believe that it is important for a board of directors to expand their thinking as widely as possible when looking for their next CEO. I have had experience in this process, not just as a CEO, but as a board of director member, and even as chair. I have never experienced a merger solely to address a need for leadership, however as a board chair of a small agency in the Richmond, Virginia area, we did create a partnership with another small agency to share both a CEO and fund development resources. It was very successful and enabled both organizations to survive the downturn in the economy.
I think it is vital that all organizations, regardless of size, step back and consider the choosing of their next CEO from a strategic perspective. They need to answer the question – what type of leadership do we need to go forward? They have to be careful not to answer that question with what type of leader will make us comfortable, just because they know us. With that in mind, I do think that organizations should consider all options when looking for future leadership. I hesitate to recommend a merger, solely to get a certain leader. Mergers have so many other implications. However, I would recommend that if a merger or cooperative agreement to share resources such as the example I gave above, is being considered, then a merger as part of succession planning could make sense.
But with all the changes in health care – more value-based contracting, more competition, more integrated care management – it is clear that many executives and provider organizations can’t keep up with the pace of change. With new market challenges and many executive directors retiring, “merger as a succession strategy” may happen by default. Marilyn Cook, LSCSW, Executive Director, COMCARE of Sedgwick County & OPEN MINDS Advisory Board Member said, I believe there will be much consolidation here and elsewhere in the next five years. It’s already happening here in Kansas. It will be interesting to see how many behavioral health providers integrate their services with primary care. It’s hard to really know what our health care environment will look like when all of the changes in payment reform unfold. Most community mental health centers (CMHC) in Kansas have a succession plan, but for the most part that entails having program line directors who are clinically trained moving into the CEO position. Clearly many clinical staff are not well versed in the financial details of their organizations as they have been busy with clinical program planning changes and managing the staffing challenges they face daily. Many of the new executive directors along with more seasoned executive directors here are struggling to catch up with the direction that health care is going in general, and Medicaid specifically.
There are 26 CMHCs in Kansas and in the past three years, eight of those centers had a change of executive director. If people retire as they have articulated, four more CEOs will retire in the next two years, so almost half of the centers will have experienced this change. One center consolidated with a larger center last year. Pretty amazing to see turnover of executive directors in almost half of our centers here, especially in a state where the executive directors have been in their positions for many years up to this point. The change in child welfare contracts (and privatization of those contracts) here in Kansas have already had an impact of new partnerships and consolidations. One child welfare provider that was not renewed is scrambling (even desperate) to find a new mission. Another behavioral health provider in our city just consolidated with another organization. It’s been common for solid, seasoned staff anticipating these changes to secure other positions in the community before the actual changes occur to better ensure steady employment. That also adds to the disruption. So this is happening all over, not just in health care… I participated in the Kansas Leadership Center program in Wichita recently, and they really focused on the difference between technical change and the adaptive change processes. Adaptive change is complex, systemic, and conflictual – with more of a focus on processes than solutions. Many leaders in today’s environment want to focus on the quick technical changes that may have worked in the past – rather than pursuing the more complex, adaptive solutions needed to thrive.
For more on the complexities of mergers in the health and human service field, join me on February 11 in Clearwater Beach, Florida at The 2016 OPEN MINDS Performance Management Institute, where David C. Guth, Jr., Chief Executive Officer, Centerstone of America, will open the institute with his keynote address, The Strategic Advantages & Challenges Of Mergers & Acquisitions.