Filling a Hole in Leadership at Ethanol Facilities
While the majority of ethanol production companies have discussed succession planning, fewer have documented, actionable succession plans in place. Putting it in writing is key, says Jason Johnson, vice president and team instruction specialist with AgStar Financial Services.
“We all know it’s a lot better to react if there’s a plan in place ahead of time, versus trying to react and make decisions in a time of crisis. It’s a lot easier to follow a blueprint,” he says, adding that AgStar asks companies about succession planning as one part of assessing a risk management plan.
Scott McDermott, partner and chief operating officer for Ascendant Partners Inc., concurs. “If somebody gets hit by a bus, you have a day-to-day operation that needs to run. You have to have some combination of backups, procedures and documentation.”
John Christianson, principal of Christianson and Associates PLLP, tells Ethanol Producer Magazine succession planning is critical for the continuation of a company’s strategic direction and vision. Without it, a company is left scrambling to fill an open position, when it should be moving forward. “You become a plant that is just treading water,” he says, “Status quo, trying to get things done, but not really working at propelling yourself forward with your vision.”
Five years ago, McDermott says many ethanol production companies hadn’t put much thought into succession planning. “I think today, it’s far improved,” he says, estimating that about a third of the industry is lagging in this area, continuing to do things the way it’s always been done. One reason for the increased interest in succession planning is that seasoned veterans are starting to retire. McDermott expects that, in the next five years, the ethanol industry will see more changeover in senior management.
Christianson has noticed increased interest in succession planning as well. In the past year and a half, Christianson and Associates has facilitated about a dozen strategic planning sessions with ethanol company boards of directors where succession planning is on the agenda. He sees it as a natural progression, as the industry moves out of tough times when companies focused on surviving and paying off debt. With low long-term debt, thanks to good profits in 2014 and 2015, many boards are setting very specific goals for the future.
When most people think about succession planning, replacing a retiring CEO is what comes to mind. But experts say there’s a lot more to it than that. Succession plans should be in place for multiple positions in top management from plant managers to commodity managers, and even board members.
David Holm, executive director of the Iowa Institute for Cooperatives, which includes two Iowa ethanol plant members, says there are three scenarios to consider. The first, and easiest to deal with, is when a top manager comes to the board with plans to retire in 18 months. The second scenario is unplanned and happens when someone leaves the company abruptly.
Long-term disability is the most difficult scenario to handle, in Holm’s opinion. An example would be a CEO facing a cancer diagnosis. Although the prognosis is good and the CEO will return to work, there will be an extended period of time when that person will be distracted, undergoing medical treatment and unable to work full time. “In the interim, you still have to run a multimillion dollar company,” Holm says.
A good first step in succession planning, Johnson says, is to take stock of the company’s human capital. List the key managers and personnel who would leave a big hole if they were no longer with the company—individuals with a long history and in-depth knowledge about the facility.
It’s helpful to make a chart of those individuals and include known information, such as when they may retire, Johnson says. Then, look below them in the ranks and identify talented employees with potential. The next question to answer is, what would be needed to get those people ready to move up into senior management positions? Of course, sometimes succession planning means looking outside to hire new senior managers.
Another vital step is to document what key personnel do and how they do it, for continuity in times of change. “If, all of a sudden, there’s an empty spot,” McDermott asks, “can you continue to operate normally?” That’s true, he says, across senior management roles, from the general manager to the lab manager. “Succession planning, in our mind, is broader than the next person you want in that position or the type of person you want in that position,” he says. “It’s all the things around that person’s role at the management level that allows the company to be effective, not only in the transition in leadership, but also in the gap in leadership.”
For successful succession planning, the board of directors needs to talk candidly to the CEO. “If you think it’s hard to have the conversation hypothetically, wait until it’s real,” Holm says. Get the CEO’s input on possible retirement plans, as well as what the company should do if he or she is killed tomorrow or somehow unable to work, such as with the cancer scenario, Holm suggests
In the past five years, Holm has worked with three companies that have gone through a situation like the example of a CEO with cancer, where the individuals eventually returned to work full time. In two cases, the plan in place was to spread job duties among senior leadership. Although that did work, it still was difficult, he says, because the company lacked the focus of having a single person at the helm.
The CEO, as someone who knows the capabilities of the staff, should also be asked for input on succession plans for other key personnel. The board may not take all of the CEO’s suggestions, Holm says, but that’s a good place to start.
Something else to decide is exactly how to communicate succession planning decisions, Holm says. An employee who is told he or she will be the interim CEO, should the need arise, may think he or she is in line to be the next CEO, when that may not be the case. And, if other staff members are told, they may come to the same incorrect conclusion. The board and CEO need to think very carefully about how, and to whom, they should reveal these plans, Holm cautions.
Getting the Best Board
Succession planning isn’t just for top management. It’s for board members too, even when those board members are elected, not appointed. “The practical reality is, even when they have a vote of the membership, often times it’s the board members that basically ask those candidates to run,” McDermott says. “Frankly, we don’t think it matters whether it’s a vote or appointed or recommended by the existing board.”
He sums it up like this: “Plan for the board you want, otherwise you’ll get the board you get.”
Board members fulfill a critical function for ethanol production companies and having highly active and engaged board members is vital to the future of the company, Christianson says. “You can see the difference in boards of directors that are engaged. These are the companies that are moving forward, have a strategy, a vision, a plan and are moving forward and executing on that plan, versus plants that are just moving along—just an observer of what’s going on, instead of determining the path.”
Christianson believes the first step is compensating board members well for what they do. Secondly, companies should raise the bar and hold board members accountable. That includes things such as reading the board packet, attending industry events and learning about issues affecting the industry. “You want people who want to be on the board, with high expectations, who want to be part of driving the business forward,” he says, adding that holding board members accountable may result in some no longer wanting to be on the board.
McDermott points to some progressive boards that have appointed one or two nonvoting associate board members, to work with the board in an advisory capacity as one way companies can identify future board members. “It allows them to almost test run board members,” McDermott says. “And it also allows potential board members to see how it works, so when they actually become a board member they hit the ground running.” A new board member, with no experience, can take two or three years to get up to speed on how to be a good board member, he adds, while an associate board member would have a much faster learning curve.
Another good strategy, Christianson says, is for boards to form membership committees to seek out the best talent for open board seats. For this to work, however, the committee must be active and effective, he adds.
Another important element, he says, is communication from the board to shareholders through newsletters, the website and shareholder meetings. Effective communication helps the membership understand the board’s function, actions and strategy for the future. This can help encourage more people to pursue getting a seat on the board. Because, although strategic board nominations are important, ultimately, elections with healthy competition for board seats are a good thing, Christianson says.
Author: Holly Jessen