Succession planning is an often overlooked issue for community bank boards, whose agendas are stuffed with business decisions and regulatory requirements. However, good succession planning can avoid many problems in the future, and attorney Thomas Hutton of the law firm Kilpatrick Townsend & Stockton talks about the right ways to go about it.

What do you mean by succession planning?

Succession planning has to be looked at as preparation for change in leadership, whether it’s at the CEO level or any C-suite job. It could be an announced retirement or an unplanned situation, such as a death or disability or an unexpected termination of employment. It can also relate to a temporary leave of absence, maybe for medical reasons, for example.

How many boards do you work with that don’t have a formal succession plan?

There are a lot of boards that don’t have a formal succession plan or are really not up to speed on how to properly handle succession planning. Turnover at community banks tends to be relatively low. There are a lot of long-serving CEOs and CFOs, so boards can become somewhat complacent. They can think, ‘If a previous retirement went well, that means the next one will be without any issues, as well.’ They don’t really think about how situations can change, especially unexpected situations such as regulatory orders or a death or disability.

Succession planning comes up less frequently than a lot of other matters, like determining compensation on an annual basis. It’s very important to an organization, however.  Addressing it too late or improperly may lead to a level of competition for a position that becomes unhealthy and may result in internal dissention or even unanticipated or unwanted departures. Maybe that “competition” would have been better to take place over a longer period of time.  Or, the successor may need to be approved by regulators if the bank is operating under a regulatory order. If the board already has someone in mind, the process of getting regulatory approval can go quicker if the board can make a solid case for the desired successor.  In short, it’s a process that should be discussed regularly.

Is there regulatory guidance that addresses the need for a succession plan?

Not necessarily. But regulators do consider adopting and reviewing a formal succession plan at least annually a best practice.

What is the role of the board in succession planning?

The board needs to develop a formal written policy that can evolve over time. It’s not just picking someone as a possible replacement; it includes understanding the process. By addressing it regularly, at least annually, they can avoid some of the problems that typically arise and eliminate or reduce the natural anxieties and uneasiness that comes with succession planning.

In today’s environment, it’s not just replacing someone with a qualified person; the bank might have regulatory issues that could make the requirements of the position different from a couple years ago. There should also be a process to address the situation of an identified replacement not being available or not meeting the bank’s current needs. A lot of thought should go into the succession plan. Just for starters, who will handle the succession planning process—the nominating committee, the compensation committee or a succession planning committee?

What kind of balance should there be between the CEO picking a successor versus the board?

In community banks, it’s pretty common for the CEO to have an expectation that he or she will have a big voice in identifying a successor. That’s fine. However, the board really needs to control the process and should rely on the CEO for input and not just “rubber stamp” the selection. The board needs to become familiar with the candidates over time and may invite individuals to make board presentations or appear at bank or industry functions as part of the long-term “interview” process. 

Couldn’t identifying a successor lead other executives to leave?

Yes. If there’s a large gap in background and skills to the other executives, maybe it’s not as big a deal. But if there are several executives who have an interest in and are competing for a position, it may be problematic to specifically name someone too early. If the board is doing this as a long-term process, it will gain a better sense of who should be the replacement and can better handle how to address those who are not selected. However, the board should not automatically assume the no. 2 person wants to become the no. 1 person or is qualified at the time to become the no. 1 person. The no. 2 person may have little or no interest or lack the full complement of skills, depending on the timing and nature of the situation. In that case, it is important to identify who will fill the position temporarily—the chairman, a former CEO on the board or someone else.