Alliance Perspectives

February 17, 2015

Case categories include: Entrepreneurship   Leadership   M&A   Strategy & Planning   

By Robert Sher

Originally published in the National Mortgage Professional Magazine (p. 77)

A maturing industry requires its leaders to act differently. As industry players grow larger to manage compliance burdens and to gain access to capital, leadership styles that worked in the past can become dysfunctional. For midsized mortgage businesses to continue growing, they will need to upgrade their leadership teams through coaching, mentoring, and recruitment.

The mortgage industry has local roots. Back in the 1970s, when S&Ls played a more prominent role, most lenders worked within their own community. Mortgage lenders knew their borrowers and the business was relationship driven. As a simpler business than today, well networked sales professionals could easily start their own business and be very successful. The business was very entrepreneurial. Like most startups and small businesses, the key was relationships and a small team to “do the work.”

However, many amazing salespeople make terrible managers and leaders. Similarly, many entrepreneurs also make terrible managers and leaders. Yet the mortgage industry was filled with successful salespeople and entrepreneurs. No wonder leadership challenges grew as consolidation began and midsized businesses spanning broader geographies became more common.

In midsized companies—those with revenues between $10 million and $1 billion—leadership must solve challenges that are more complex (like IT systems, multiple offices, capitalization) requiring many specialists to work together as a team. These projects can take months to execute, requiring project management skills. Ownership of the firm is often by external sources like private equity firms or the public, placing stringent demands on company leaders. With scale, longer term planning is required, and leaders will be held accountable for results. And in the mortgage industry, the compliance burden has grown, with no quarter given for smaller players.

Delivering high performance and staying competitive in a consolidating market is no easy task. Building and maintaining a strong top team for a midsized company requires the following steps:

1. A functioning board of directors. Far from being a board of opinions, the board must be stocked with experts on an array of topics so that the board can provide world class support and guidance to the management team. Board members must act in a fiduciary capacity, not just as an advocate for their ownership interests. Outside (non-owner) board members are crucial as well. A good board holds management accountable to achieving its plans without micromanaging (unless management is failing). High on the list of board duties is hiring and firing the CEO.
2. A great leader in the CEO seat. A dysfunctional CEO is usually impossible to overcome. The CEO must either be excellent and ideal to take the company forward, or be actively and eagerly learning new skills and leadership approaches. CEOs who wish it were still like “the old days” or who can’t objectively reflect on their own behavior are a big roadblock. Boards that fail to upgrade a dysfunctional CEO are failing to perform their duty.
3. A C-suite that embraces change and the next level of discipline. Identify those leaders who want to step up their game, then mentor and coach them. Dismiss those who choose to resist change. Even with a great leader, companies can only go so far. Beyond a headcount of 75, continued growth requires a team of leaders. Many midsized firms in every industry get stuck because the CEO tolerates dysfunctional leaders.
4. Design the organizational chart for the future. Outline the right management structure and job descriptions for taking the company to the next level. Typically, this includes the C-suite, the VP level and the director level. Beyond just drawing boxes on a page, identify the key skills and experience each position will require. Once you’re done, start to fill in names from your current team that you are convinced will do a superlative job (perhaps with some training). More than likely, there will be gaps.
5. Devote resources to recruiting a strong team. Small companies often find a friend willing to do the job and stick him or her in the seat. Well-run midsized companies are much more diligent about finding the ideal candidate. They continuously scan for top talent and maintain relationships with them so they can recruit them when the time is right. They invest in head hunters to reach into the industry and beyond, finding quality candidates willing to consider a change. They leverage their board and investors (think private equity firms) who have connections to proven leaders. Recruiting isn’t something midsized companies tinker with occasionally when in need. It is an ongoing effort with disciplined campaigns around filling key positions. Do it well. Today the mortgage industry has many midsize and larger players with strong executives leading those organizations. These leaders should be part of your network.

Consider the case of Comstock Mortgage, based in Sacramento, CA. Craig Sardella, Alliance member since 2004, founded Sacramento First in 2003, and merged it with Comstock & ATM Mortgage in 2007. “We both needed bigger net worth to remain competitive,” he says. They grew Comstock through more acquisitions during the 2008 downturn, and the board swelled with a group of successful entrepreneurs. Craig says, “Each of us as owners were very successful, but it wasn’t easy working as a team and as a board. I served as president for the first five years, but it made sense to bring in an outsider into the role in 2008, and I refocused my energy on acquisitions and production. By 2013, we’d nearly doubled our originators volume.” Comstock grew its volume to $750 million during a downturn in the industry, even while competition continued to be a drag on growth and profitability. He says, “We could see how larger, better capitalized competitors could afford incredible leadership teams and could afford to retain their servicing while maintaining profitability. Net worth was a driving force in upping the game in our industry.” In September 2014, Comstock sold to Guild Mortgage, which has 12 times the loan volume. He says, “Our ability to grow profitably since 2007 into a strong midsized firm with a headcount of 200 made us a very attractive acquisition for Guild and a strong next step for Comstock’s owners.”

Midsized mortgage companies can be profitable and successful as the business environment changes but only if they embrace the leadership changes required to maintain growth while managing the increasing complexity.

Robert Sher is the author of MIGHTY MIDSIZED COMPANIES: How Leaders Overcome 7 Silent Growth Killers (Bibliomotion; September 2014) and the founder of CEO to CEO.  Sher has worked with executive teams at more than 80 companies to improve the leadership infrastructure of midsized organizations. He has been an Alliance member since 1996 and an Alliance Director since 2008.