For many firms, a former owner or CEO who refuses to step out of the way can stymie new leaders and derail a carefully planned succession.
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Advisors can have a difficult time mentally and emotionally walking away from the everyday operations that they helped build or the clients who, in many cases, have become friends. It makes the need for a well-planned succession of the utmost importance.
But when Michael Gragnani takes the top spot at Diversified Trust in January, he’ll see former CEOs and owners pretty much everywhere he looks. And for him and the company, that’s a feature, not a bug.
Diversified Trust’s latest CEO transition offers a case study in tackling one of succession planning’s most difficult challenges: how to hand power to the next generation while preserving the knowledge of and relationships built by the firm’s former leaders. Its answer combines a multiyear planning process, employee ownership and a structure that turns former CEOs into mentors rather than an old guard looking over their shoulders.
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Culture and ownership
Founded in 1994 by a group of Memphis, Tennessee-area businessmen, Diversified Trust is an employee-owned independent trust company and wealth management firm with nearly $15 billion in assets under management. In the early days, the goal was to build a sustainable business by gathering nimble minds and willing clients.
The firm had investors and board members drawn from successful area businessmen and the founders’ friends and acquaintances. Those people not only helped guide business decisions, but they lent credibility to a young firm asking clients to trust them with millions of dollars.
“Their real value was giving us great wisdom and introducing us to folks who may need our services, and just helping us think through things,” current CEO and co-founder Samuel “Sam” Graham said. “They were great.”
When one of those advisors suggested buying out the investors and taking total control of the company, the founders listened and became an employee-owned shop. That structure has become an enticement for top talent who see their own future investment opportunity.
Today, Diversified Trust has around 70 shareholders, and no one owns more than 8%. Employees can be invited to purchase shares when the board deems fit, and it can be part of their recruitment process.
But that means that current owners then have to be willing to sell their own shares to those employees. That willingness, the current, former and incoming CEOs say, is key to a culture that signals to employees that they are valued.
“We have put together a guideline that says if you’re a shareholder, here’s the expected life cycle of what will happen: You’ll have an accumulation phase, you’ll have a maintenance phase and then you’ll start a slow divestiture stage at some point in time,” Graham said. “We have said we don’t want to be owned by two or three people with a bunch of order-takers underneath. We want owner mentalities as much as we can have in our employee group.”
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Diversified Trust’s first CEO transition
Despite its growth and success — Diversified Trust was managing $3.8 billion in client assets — around 2011 there was a growing realization that the firm needed a different kind of leadership.
Larry Bryan, the firm’s first CEO and a co-founder, was heavily focused on the client-acquisition needs so vital in those early years. But Diversified Trust was adding offices and expanding its footprint. It was entering a growth mode that wasn’t Bryan’s strong suit.
“We had some management needs that maybe had not even been responded to as much as they should have been, because quite honestly, if you’ve got a whole lot of client responsibilities and you got management roles … that other just kind of slides a little bit,” Bryan said. “My love all along has been the client side of things. The idea of spending most of my time managing multiple offices, multiple people, as we continue to grow, was just not exciting to me.
“When I stepped out of the CEO role, I had the largest client base of anybody in the firm,” Bryan added. “And you can imagine if you’ve got the largest client base in the firm and you’re the CEO, trying to manage the firm, you by definition have got yourself spread too thin, and that is not a sustainable long-term situation.”
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The firm pivoted quickly to Graham to bring up the level of the firm’s organization.
“We all left big bureaucratic organizations. We were allergic to structure and bureaucracy. But you can’t scale something, you can’t really be the best you can be, if everybody’s making it up as they go along,” Graham said. “We weren’t that bad in that regard, but we probably talked more about what the company was going to be like versus what the leadership was going to be like.”
That even bled into the process of selecting Graham and installing him as CEO, something that took only nine months.
“We just felt like, ‘We’ll figure that out.’ And so when the time came for the transition, there wasn’t a whole lot of … planning on the process of succession,” Graham said. “It was, ‘We’ll figure out who it should be, and then they’ll do great.'”
Part of what they needed to figure out was the dynamic between Graham and Bryan, who didn’t leave the firm. Instead, the former CEO became director emeritus and kept up with his clients.
That did add a little more pressure to the situation, Graham said.
“It felt natural to try to follow him, but I’ll be really blunt, a little vulnerable,” Graham said. “He was so good at it. I just tried to be Larry 2.0 and honestly, that wasn’t good for me, wasn’t good for him, wasn’t good for the firm.”
It was a lesson that Graham was determined to pass on to his successor.
“It took me a couple years to kind of figure out, and I told this to Michael: ‘We don’t need a Sam 2.0, and we didn’t need a Larry 2.0. We needed something different to help guide the firm to the new era,'” Graham said. “Larry was humble enough to let me make my own mistakes, but also try to make sure I didn’t make any big mistakes.
“I look forward to being an institutional memory like Larry has been in that regard, but also to write some thought leadership white papers,” Graham said. “I’ve been in the industry now over 40 years. I look to keep some relationships with Michael and others, and mentor the heck out of the next generation, which is so talented. What can I do to help them, and frankly, get out of the way in many respects?”
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Diversified Trust’s incoming CEO
The transition from Bryan to Graham worked, but the board might have seen that as luck. One standing order Graham got when he took over was that the next transition would be different. The board insisted that when Graham was ready to step down, he must give five years’ notice.
“It sounded crazy to me at the time. I thought, ‘Five years is an eternity. Are you serious?’ But they were serious,”‘ Graham said. “They wanted us to come up with our strategic vision. Who is our internal talent that we should be looking at, giving them increasing responsibility? Should we look outside? What are the risks and rewards of looking outside? And going through that whole process very deliberately with a committee of the board that was commissioned to do this, and then keep the board involved, and that’s what we’ve been doing.”
That five-year requirement came into play a little more than four years ago, and the firm eventually landed on Gragnani, managing principal for Diversified Trust’s Atlanta office, who has been with the company for about eight years. When he takes over in January, he’ll have two former CEOs still in the fold.
Rather than move into a Tennessee office nearer to Graham and Bryan, Gragnani’s sticking to the firm’s Atlanta office. He jokes that the former bosses will have to cross state lines to get too involved. But truly, he’s looking forward to their guidance.
“I’ve been asked by other people when they learned that I was CEO: ‘Hey, is the other guy leaving?’ It’s like, absolutely not. It’s not the kind of place where everyone’s cutthroat trying to get to the top. It’s such a collegial place, and it’s been so awesome to watch Larry and his interactions with Sam, even in my short period of time here.”
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Gragnani is also thankful that he’s stepping into the position as the company rolls out a new strategic plan. It cuts down on the uncertainty not only for the leadership team in place, but for the rest of the company’s employees who want to know what to expect from a new CEO.
“As I’ve been visiting with colleagues around the firm, inevitably people are going to ask, and have asked, ‘What are your goals, what are your plans, what are you going to change, what are you going to do?'” Gragnani said. “And I get to lean on the fact that we just completed this strategic plan. So we’ve all stacked hands as a firm and said these are the areas that we’re going to focus on for the next five years, and we’ve got people in place to execute on those.
“I think that’s probably something that [we] learned from previous transitions,” he said. “Let’s set this next leadership group up for success by giving them a runway of things to work on.”
That plan, Graham said, opens up a whole new way to think about the transition.
“It’s not smart, in my opinion, to think about it as a CEO transition. It’s a leadership team transition,” said Graham, who will become chairman of the board after he steps down as top executive. “Everybody has an opportunity to step into new roles, and you’ve got to match everybody’s individual strengths to what that role should be going forward.”
To that end, it’s not only the CEO position that’s changing. Brook Lester, Diversified Trust’s managing principal for the Memphis office and the firm’s chief wealth strategist, will also succeed T. “Lee” Gibson as president.
But there’s still solid support just over the state line.
“I know that I can go to Larry, I can go to Sam, and I can say, ‘Hey, Brook and I are thinking about this thing, or changing this committee up, or thinking about some strategic idea for the future. What did you guys do in those situations?'” Gragnani said. “I don’t feel any negative pressure by any means. The only pressure I feel is to carry on this legacy that they’ve created.”
