David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: securing the future.

We've previously talked about the tax field being in a period of transition and what skills younger practitioners need to succeed, which you'll find linked to in the show notes.

Today, we're looking at the other end of the stick and what companies should consider as they work on succession planning and recruiting new leaders. Joining me now to talk more about this is Tony Santiago, founder and president of TaxSearch. Tony, welcome back to the podcast.

Tony Santiago: It's a pleasure. Looking forward to it.

David D. Stewart: So why don't we start off with the issue of succession planning. What makes that important these days?

Tony Santiago: Well, we've got a couple of issues that are going on. Demographically, we have the retirement of the baby boomers accelerated partially by COVID as well as the additional workload that's been put on the senior tax leaders the last four or five years, culminating in the election.

We're also having challenges recruiting and attracting younger accounting tax professionals into the field, and clearly we still are dealing with this captive labor pool where the U.S. tax code is so dramatically different. The access of talent outside the U.S. is minimal, other than possibly you've got some of the shared service center concepts that are in India for low-level work, but nothing at the more mid-tier to senior level. So we have a supply and demand scenario right now. We're exiting more senior leadership people out. That's creating demand for us.

Developing internally succession planning models — much more pressure being put on tax departments these days for that, not only at the number one to number two level, but also going two, three, four levels deep trying to plan out a little deeper and putting a pipeline of talent internally in some of these in-house tax departments when it's possible to do that.

David D. Stewart: What sort of considerations should tax departments be making for the sort of timing and how to proceed with the transition?

Tony Santiago: Yeah, the earlier they start, the better. Like I've mentioned, start deeper in your talent pool, not just at your number twos being aligned for succession planning potentially to the number one role, but also the number threes and fours depending upon the size of the department. So sometimes that's just not reasonable with smaller tax departments, but clearly where you can, you need to go deeper. The earlier you start, the better. If you think somebody's at risk either for retirement or you're worried about potentially they've topped out in the role and there's a likelihood that they will be actively looking to make an external move, just where they are in their own careers, you need to have somebody ready to back up for that role. At least one, maybe two people at that point.

Going too far out is not realistic. Five-year plan, it sounds good in theory, but the chances of you keeping somebody for five years if they're ready to go into that role in the next one, two years is not likely. So sometimes you're just not going to have the timing lined up, and somebody might be ready for that role prior to when you will have that opening available. On the other side of the coin, you might have people who aren't quite ready yet when the role is going to open. Especially this has happened lately in the last two or three years and continues currently, where we're getting notices of retirements in a very short time frame, usually within a 12-month window, sometimes even much less, where people just come in and announce they're going to leave.

The other component is these voluntary severance offerings that are being offered. More people are accepting than anticipated. So we have a higher volume of people accepting these voluntary severance offerings and leaving, and they're at a younger level than was expected. So that's unexpected turnover where we're sometimes losing our succession planning candidates for the number one level or the number two to the external market, but even not for career opportunities.

They're taking the packages and then going out to find roles afterwards and taking a break because the market's so strong for those types of people; if they have all of those EQ and IQ skill sets, they really control the market right now. So timing is a touchy one. You can do it too early and not realistically be able to hold them. You can do it a little too late and have lost them before you get a chance to get them into the role. So it's a judgment call that each person has to evaluate on their team based upon what the circumstances dictate.

David D. Stewart: So you mentioned that there was a supply constraint, I guess a tight market for these employees. So what types of candidates are you looking for out there? Where can companies find the talent that they need?

Tony Santiago: Assuming you don't have it internal, and I say be careful that you don't miss the obvious. I see some companies ask me to conduct searches where I realistically think they have the person they need on staff, but for some reason, they haven't not positioned that person properly. They're not getting the exposure visibility. So this is really important for one to really do their homework on the development side of succession planning. It's just not designating somebody; it's mapping a roadmap for them to be considered by leadership as a viable candidate for those roles, whether it's a number one role or a number two role. So start internally, make sure that [person] is not really there, and then go external.

When you're going in external, you're really going to map out — again, the timing will dictate what you can attract. If it's a short time frame, a 12-month time frame, then you can realistically go out there and hire somebody who's already an established number one, and they can do basically a longer transition period, especially if it's a complex company, larger scale, or a different industry that one's moving into. That gives some people time to kind of get integrated into the company.

But if it's realistically looking at a longer time frame, you're going to have to be realistic about the numbers to retain that person and the profile that you're looking for. You really don't want them to be ready today because they're not going to be happy waiting two, three years and sitting in that role normally, unless there's some extenuating circumstances.

So the profile and the timing are really important to be synced together. And where we tend to look for people is a combination of leadership skills, influencing skills, and I separate those two. More and more leaders are having to be taking on roles in policy and high-level controversy situations where the influencing skills are very important. Then you've got basic leadership, where you can motivate and build a culture within your tax department that's attractive to retaining people as well as recruiting people into that environment. And then you've got technical competencies, and the broader the breadth, the better.

And that's always been a problem for us because after the '86 act, we started really seeing the accounting firms segment people into specialty areas. It allowed them to bill higher rates. So you had international people; you had people that would stay local; you had general engagement, people that didn't have much international or didn't have much state and local. So we segmented them, and then they were able to build them out. But then when they moved in-house, they also started to get — they built silos. You had the state and local group; you have the tax operations, which is compliance and limit tax reporting provision; then you had the controversy group; and then you've got the planning groups. And sometimes you've got what I call "statutory," I mean analytical planning type of functions. And then you've got the strategic high-end legal planning as well on the very large companies.

So this segmentation makes it difficult to find broad leaders later on in their careers, and that's our challenge. The breadth of technical with the people skills, leadership skills, the communication skills, influencing skills, and the desire to, quite frankly, align strategically at the business level. Because that's another element that is really challenging: Some tax people are great technically, but don't really see the big picture and don't align as effectively as they could and should at the strategic level. So when you're sitting in front of a board and audit committee, they're lacking some of that exposure. It's a challenge to find people with everything. So if you can groom them internally, that's great, but you'll need a bigger budget, and you'll need to have a business development plan for those individuals to pick these skill sets up prior to when the job opens.

And unfortunately, you won't always know when it opens. It could be a medical issue that pops up. It could be an accelerated retirement that catches people off guard. It could be, quite frankly, just new leadership coming in wanting to replace the heads of tax, and these people internally might not be ready, and then you've got to fight the market and compete with everybody else.

David D. Stewart: All right. So that does bring us to the question of when it is time for this transition, what should that look like? What are the best practices?

Tony Santiago: Overlap as much as you can is always my preferred recommendation. So I'm currently working on two leadership roles, one where I have the nice overlap probably until March 31 and another one where I had literally 30 days from the date I got the search to start. So the person was clearly going to be gone from the role before the person was hired and on board. So there was no handoff there. Those are two different situations, and in fact, we look for candidates that can handle that comfortably, and you're very transparent about it. But ideally, best practice is as much overlap as you can if you have control over the timing of it. Secondarily, make sure all the key stakeholders are in alignment as to what we're looking for in the new role if we're doing it externally. If it's internally, make sure all the key stakeholders are willing to support the internal candidate. That's very important that you don't have some people being grudgingly accepting that they're hiring and bringing them in.

And it sometimes happens internally where people just haven't really developed those relationships and rapport deep enough. But with good proper planning and development models, you can take care of that. Externally in the market, everybody's new for the most part, generally speaking. So it's a first impression relationship, and best practice there is to really have those stakeholders involved early and consistently in the process so that by the time we do cut down to the short list and the interviewing and we get the feedback, we should all be in alignment with each other, and the candidates should already be in alignment with that based upon the recruiting efforts being done. Then you've got the onboarding. That's very critical to after you do hire the person. So that's a whole other meeting in and of itself to effectively onboard people.

Give them a chance to get all the exposure they need to, including spending time, if they're an external candidate, getting to know their team. And if they're an internal candidate, there's the other side of that coin, which is making sure those internal candidates that they work with that used to be peer-level are now comfortable reporting to that person and preparing for any potential shakeout of that. You might have turnover if you're not prepared for that and haven't thought that through. So that should be part of your best practices on internal candidate promotions, looking at what the domino effects of that might be in a negative sense.

David D. Stewart: Now you mentioned earlier that we're seeing a changeover of older workers retiring out of this market. So what do we do to replace this leadership that we're beginning to lose?

Tony Santiago: So there's two pools that you can replace the leadership with. One is the next generation, which if you're a boomer, the next generation is the Gen Xers. They're a smaller pool unfortunately, just due to general demographic trends, but also in tax. We lost a large portion of people to bad press we had when Arthur Andersen collapsed and Enron, and we're all cognizant of some of those scandals and the threat of a flat tax when [Steve] Forbes was running. So a lot of people did not pursue tax careers then. So we do have a bubble shortage compounded on top of the demographic Gen X population being smaller than the boomers. They also were held back by the boomers. So a lot of them are more specialized in narrow areas. So they might be in tax ops, effectively really good there, but not in planning or controversy and vice versa. So the pool is limited.

Most of those people in the Gen X population have already been absorbed. We right now have about 64 percent, as of my last data points, of the heads of tax are Gen Xers now. So we've absorbed most of the ones that we're really positioned to or wanted to. That's a whole other issue as well. A lot of people really have seen what the heads of the tax role responsibilities are, and there's a bunch who just simply don't want that pressure and don't want to be in that hot seat. So it's both a talent pool availability and also an interest level and enthusiasm to do it.

So next, you have to go to the millennials and that's pretty much it. And you're really looking at the older millennials for the number one roles, and that's even a fringe. I think we're only about 9 percent of heads of tax in the U.S. in the millennial population. But that has to increase, which means we have to really put pressure on development of the older millennials and broaden them out technically, number one. So if you've got planning people, get them rotated through operations; if you got operations people, rotate them through planning, get them exposure to audit controversy, start getting them to think about policy issues and complex controversy issues as well. It's a daunting task, but I don't think there's any other solution to this.

Again, importing workers from outside the U.S. that are predominantly indirect tax people into tax leadership roles in the U.S., which is predominantly a direct tax environment, is just not risk tolerance available. You can't take that risk if you're a CFO. It's too complex and too much different at this stage. So we are limited to the pool in the U.S., and that leaves us Gen X and millennials. And we'll be fighting for the really good millennials that have the IQ and EQ. That's going to be the battle. And for the ones in the Gen X pool that are still staying around, unfortunately a lot of them are using target dates of a little earlier in their retirement. So where the boomers were looking at 65 and were comfortable with that — some started retiring a little earlier, but that's still the model — the Gen Xers tend to talk to us in a year in that 62 range or earlier. That's what we're seeing. We'll see financially if the economy stays strong and they'll certainly be able to do that.

David D. Stewart: So looking out at the market, what are you looking for in this next level of leadership?

Tony Santiago: It is that combination of technical competencies, but putting more weighting now on the interpersonal communication skills, the ability to build cultures, that leadership component and that influencing skill I've said. I think the influencing skills become more important. They need to be able to command the room when they go into an audit committee or board when needed to on their topics. They certainly are not going to run any of those, but they do need to be able to build the confidence in the board members and the audit committee members that when they speak on tax matters, they understand what they're doing and they're getting the advice they should be getting. We're starting to see more tax people end up on corporate boards earlier in their careers, even prior to retirement.

Those who have those influencing skills, those who've gotten broader breadth across the board beyond tax. Also getting exposure in statutory accounting now because of pillar 2 implications, with Treasury, because a lot of tax people have taken those responsibilities on, and as well as risk management and some others. So we're looking for the full package. Unfortunately, that's the reality of it. Every CFO is wanting that. And the old days of getting a good technical compliance shop leader, they're pretty well way beyond that now though, that doesn't fly anymore.

David D. Stewart: Changing the perspective on this, if you're advising someone who wants to get into one of these roles, what would you tell them to do? What steps should they be taking?

Tony Santiago: So it's a balance of developing. Number one, really look at the breadth of your technical skills and get that additional exposure. If you're in planning, make sure you get closer to what's going on on a consolidated provision and what the compliance cycle looks like. You don't have to lead it, but you have to be in there and be deep enough in it to understand someday. You need to ask the right questions of your advisers when you are signing that tax return and you are the one that's responsible for that tax accounting provision consolidation, so that's there. Also get exposure to audits and controversy. The days of having low rates of audits and controversy issues, I think, are over for the next who knows how many years, but clearly every jurisdiction needs revenue, and we're going to be the place to come to. It's much easier than getting it from a citizen that can vote.

So we know it's going to be corporate taxation that will be aimed at the most. Then policy has to be something to get comfortable with. So develop your communication presentation skills. This is part of the influencing skills at the controversy level and at the policy front-end level, front and back. So don't be afraid to take a debate class. Don't be afraid to sharpen up and get some skill sets on how to present effectively. You're going to be presenting in front of boards and audit committees. That's an art in and of itself. How to make something that probably should be on 20 PowerPoint pages be on one and take three or four or five minutes to explain, and be prepared to answer those questions. All of this is something that you have to have in a head of tax role in the future now. I don't see any shortcut around this.

We talked about leadership development of staff, people. You are in the people business. Your tax department is not a product. It's a group of people. You need to continue to develop and invest in them, and you need to build a culture where they want to be there until they outgrow the company. And if they do, that's fine, but then they'll promote other people to come in because of the experience they've had. You need to have a magnetic approach to this on recruitment and staffing and retention. As I said, the old technical focus as being the really 90 percent and the 10 percent was the other is definitely not there anymore. It's a way more balanced approach on what we're looking for on the head of tax.

David D. Stewart: Now finally, I want to ask you a question that's sort of an issue that the wider economy has been dealing with, and that's remote work. What are you seeing as far as the trends in remote work within the tax function?

Tony Santiago: It's a great question because we see a lot of different options out there. But the common trend is we're seeing a movement back in-house, and I'd say the movement is more to hybrid. Clearly our last data studies have about 83 percent of the tax departments we track, over 1,400 of them, are in hybrid mode. We have some that were remote and stayed remote, some that were remote and moved back in, some that were remote and then moved to hybrid and now they've moved to full in-house. So there is a trend for some CEOs to push for full back in the office. As you know, we've had some big technology companies make those statements. Even some of the accounting firms are starting to push back the other way. But clearly it's hybrid as the dominant focus now. And I think that can work. It gives you the blend. The big challenge with remote is how do you build leadership people on a remote basis?

And I'm not saying you can't. I just finished a search right now for a client that has over $5 billion in revenue. They were remote, however, prior to COVID hitting. It wasn't a reaction to COVID; it was a part of their culture from day 1. And they've done a really good job of building a good culture there with that and keeping that model. And it works for them. But most of our fully remote ones tend to be smaller companies really trying to build that talent pool in a place where they don't have as much to offer in some ways as others. Or there are portfolio companies of the PEs, they tend to be looking at a three- to five-year flip anyway, so they don't really pressure so much to be in the office. And that starts from the leadership team down. So those tend to be the ones that is, some companies still large scale, Fortune 500, that are touting fully remote, but most of those are breaking that down and starting to move back into at least hybrid.

David D. Stewart: Well, I think you've given a lot of our listeners a lot to think about. Tony, thank you so much for being here.

Tony Santiago: It's always a pleasure. And everybody, laugh while you're working as hard as you all are these days. Please keep your sense of humor; you're going to need it. I wish everybody the best. Take care.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, William Vandenberg and James Braswell examined the 2023 update on income tax disclosures from the Financial Accounting Standards Board. Jeffrey Hoopes analyzes views by various tax professionals on whether the IRS should regulate tax return preparation.

In Tax Notes State, three McDermott Will & Emery practitioners argue that a recent Nebraska Supreme Court decision supports full factor representation for section 965 income. Ted Peterson examines potential adjustments to the TCJA in light of the 2024 election.

In Tax Notes International, Carl Berlin and Daniel Rath explain why certain portions of the pillar 2 project may pose challenges for the international maritime industry. Three tax practitioners explain how strategies for dealing with India and U.K. transactions are evolving.

And finally, in featured analysis, Joe Thorndike examines the Fries Rebellion, an armed revolt in Pennsylvania against the first federal property tax.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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