Leadership succession represents a growing challenge for community banks—and their boards of directors—especially in the current environment. Far too often, banks lacking sufficient executive talent or proper management succession are scrutinized by their regulators. In the worst cases, some banks may even be encouraged to find a merger partner. This dynamic has played out too many times during my 25 years in executive search serving the banking industry. Thus, one thing stands out clearly—talent matters. Superior talent really does make a difference, especially for banks intending to remain long-term survivors.
Think about how commoditized and seemingly similar many bank products have become. Plus, given the broader array of financial services firms, such as mutual fund companies, credit unions, brokerage firms—all of which offer redundant or wanna-be products—how is the customer to decide with whom to do business? What sets our most successful clients apart from their competitors today is less about strategy and differentiation, and more about how well they execute that strategy. And these clients know that the variable factor around execution nearly always comes down to people.
Despite decades of well written books and Harvard Business Review articles, few companies remain fully committed to fundamental business activities such as leadership development, talent management, grooming high potentials, and overall people enhancement. Furthermore, nearly every piece of research regarding leadership succession validates that internally groomed successors almost always perform better and cost less than outside hires. It might seem antithetical for a professional executive recruiter to encourage clients to develop their own talent, but facts are facts. Still, too many of our clients either make a half-hearted effort at talent development, or nibble at the outer edges until the next round of expense cuts.
Developing talent for the long run should not be daunting, and does not require huge amounts of funding. What it does require is a commitment to the process of developing future leaders throughout your institution. Becoming what’s known as a learning organization requires a mindset shift that may take years to root deeply, yet pays huge dividends over the long term. Plus, the option to look outside for executive talent—whether for a strategically critical role or to deal with succession challenges—always exists. It should remain just that—an option—but not a necessity. Here are seven action steps for bank directors and incumbent CEOs to emphasize with their talent agenda:
1. Make discussion of the bank’s talent and leadership development activities a regular agenda item at board meetings—not just annually, but at least quarterly.
2. Hold the current CEO and other executive leaders accountable for grooming their successors. Linking a meaningful portion of executive incentive compensation pay to the achievement of these goals will provide appropriate motivation.
3. Don’t be afraid of selectively using some outside experts, such as an executive coach or organizational development professional, to assist. Your senior leadership team might be good, but support them with the right tools to help them develop their people.
4. Developmental opportunities should involve more than traditional up-the-org-chart advancement. Much learning can be accomplished via lateral moves, special project assignments, add-on responsibilities and the like. Think outside the box when it comes to stretching your people.
5. Let your up-and-comers know that they matter. Your handful of rising stars want to hear it, and letting them know that they have a bright future ahead may do more to retain these high potentials than anything else you may offer.
6. Shift your compensation programs to a pay-for-performance orientation, and reward your best performers appropriately. Giving everyone the same raise regardless of performance creates a disincentive for high-impact players.
7. Don’t ignore succession at the board level. Director succession may be the most sensitive topic in your boardroom, but that doesn’t mean that it shouldn’t be put on the table. Make director development or board repopulation a regular agenda item as well. Board skills need refreshing and updating too.
The institutions that survive and thrive over a lengthy time horizon benefit from the successful execution of strategy which flows from a continuity of leadership. CEOs and boards of directors must recognize this imperative, and regularly prioritize talent at the top of their agendas.