Coronavirus Tests Banks’ Emergency Succession Planning

When it comes to emergency succession planning, banks prepare
for the worst and hope for the best.

The coronavirus crisis has reminded us of the importance of emergency succession planning at banks, as well as related disclosure considerations. Boards must create emergency succession plans in the event a key executive become incapacitated. Some institutions may need to activate these plans during the pandemic and may wish they had spent more time detailing them in calmer, more predictable times.

“When you think of disasters, a lot of people think of
natural disasters and don’t really think about pandemics. That’s where that
succession planning comes in: Not that we wouldn’t have this for a natural
disaster, but the chances of somebody dying is pretty small,” says Laura Hay, a
managing director at executive compensation firm Pearl Meyer. “Here, there’s a
much higher likelihood of, at least temporarily, needing some additional
support.”

The coronavirus pandemic may last for months, if not over a
year, in the United States. There were about 800,000 confirmed cases and about 40,000
deaths as of April 22, according to economic data firm YCharts; 4.16 million
tests have been administered. Some groups are at higher risk for a severe
illness from Covid-19 than others, according to the Center for Disease Control
and Prevention, including adults over than 65 and individuals who have
underlying medical conditions.

Executives and directors at many banks are particularly vulnerable, based off this. Seventy-two percent of CEOs at institutions participating in Bank Director’s 2019 Compensation Survey were 55 or older; 2% were older than 74. Board members were in the same demographic, with a median director age of 64.

At least one financial
firm has disclosed a death of an executive due to Covid-19: Jefferies Group CFO
Peg Broadbent died of complications related to the coronavirus in late March,
according to Jefferies Financial Group.

Spirit of Texas Bancshares Chairman and CEO Dean Bass took medical leave after contracting the coronavirus, according to an April 7 regulatory filing from the Conroe, Texas-based bank. The board appointed Chief Lending Officer David McGuire to serve as interim CEO and director Steven Morris to serve as acting chairman in his absence. Bass resumed his duties at the $2.4 billion bank on April 13, according to a subsequent filing.

Emergency succession plans differ from long-term succession plans in key ways, Hay says. It is prudent for boards to inform the individual who will be appointed interim or successor in an emergency to prepare them for the role, while directors may want to keep their thoughts on long-term succession plans under wraps. More than one-third of respondents to Bank Director’s 2019 Compensation Survey had not designated or identified successors for the CEO.

“People need
to get more detail in their plans, and they should not just focus on the CEO,” Hay
says. “You need to identify and communicate who that person is, and probably
allow them to talk about how a succession would work, with a certain level of
detail.

In times like these, banks may want to extend contingency planning to the board as well. This will not be a theoretical exercise for some companies, Hay says; a director at one of her clients recently died from Covid-19. Other directors may be available to step in, though banks should have conversations about appointing an acting committee head who could fill the potential vacancy.

Another major consideration for banks during the pandemic will be the decision to disclose a diagnosis or illness of an executive. Securities rules gives “substantial discretion” to boards weighing the material nature of such disclosures, according to a January article by Fenwick & West attorneys. A disclosure is only necessary when there is “‘a present duty to disclose’ and the information is considered ‘material,’” they wrote.

The wide range of Covid-19 symptoms and outcomes means the
disclosures will probably be on a “case by case” basis, factoring in the
materiality of the individual or affected operations, says John Spidi, a partner in the corporate practice
group at Jones Walker.

“In those
cases where it is not completely clear disclosure is required under SEC
regulations, it’s probably a good idea to make the disclosure if the individual
involved has a material impact on the company or its results of operations,” he
says.

Boards may even opt to not disclose if the executive can continue performing their key duties, which seems to be what Morgan Stanley did after Chairman and CEO James Gorman tested positive for Covid-19 in mid-March. Gorman led regular calls with the bank’s operating committee and board of directors in self-isolation. He shared the news in early April via a video message to employees, saying that he did not experience severe symptoms and has fully recovered, Reuters reported.

Hopefully very few banks will need to activate their emergency succession plans, but Hay says creating detailed strategies protects shareholders and keeps operations stable during an otherwise chaotic time.

“If you don’t have a plan, or your plan is super high level where you have to think about how you’re actually going to deploy it, you’re behind the eight ball,” she says.