Given the increase in shareholder activism and regulatory oversight, financial institutions have to revisit succession planning as part of their governance practices. What if your CEO, or other senior executives, cannot continue to perform in their roles? Your shareholders and regulators want to know that you have in place a solid plan of action if called upon in an emergency or as part of your long-term vision.

Because succession planning is not a new idea, only a recent hot topic, you may already be familiar with it. You may already do it consciously or without realizing it. In either case, you are a step ahead. Whether you are in the lead or still a bit behind, it is a good idea to consider a few issues with respect to succession planning.

Fiduciary Duty

Directors have a fiduciary duty to work toward identification and mitigation of major business risks, including the loss of senior executives. Turnover can be unforeseen and immediate or it can be expected and deliberate, or somewhere in between. The board must consider its possible impact on the company. In addition to considering a CEO successor, the board should also consider other key positions like the chief financial officer, chief operating officer, division heads and other key officers.

Succession Planning for Executives

There are no set rules for succession planning. The board has free reign, but should focus its efforts to be productive. An initial step would be to open dialogue with the most senior executives within the company. Ask if they have given thought to their own long-term plans. Ask their thoughts on succession. Ask about contingency plans. After the board understands where the company is, it can begin to develop a plan to get the company where it should be. In developing its plan, the board should consider:

• Will succession planning be a task for the entire board or a committee?
• Will the CEO be “on board” with the effort?
• What are the short- and long-term business needs that the plan must meet? Is there a specific timeline?
• Is it best to have separate short-term and long-term plans?
• For which executive officer positions is a plan most critical?
• What skills and experience are required for each position?
• Has the incumbent identified any potential successors?
• Does the potential successor require additional training or professional development?
• If the incumbent has not considered succession planning, how does the board evaluate potential successors? Should the process be different for internal and external candidates?
• Does the board need the assistance of external advisors to successfully implement its plan?

Once established, it is critical for the board to regularly revisit its succession plan. In order to stay on course, the board should consider scheduling time quarterly to discuss progress toward the plan.

Also, the board must guard against the process turning negative. A mishandled attempt at succession planning can lead to bruised egos and weakened morale, especially among internal candidates passed over for promotions. The board should strive for a process that allows potential successors to understand they are critical to the organization and what they need to do to continue to grow within the organization. At the same time, the board needs to avoid creating an overly competitive environment that fosters discord and animosity among executive team members.

Succession Planning for Directors

Not only must a board of directors address the risks associated with executive succession, it must also look internally at director succession to ensure that the composition of the board continues to satisfy the changing needs of the company. Self-assessment and evaluation should be part of the board’s annual process leading to the recommendation of the slate of directors for the annual shareholder vote. The board should view director succession in the short-term and long-term. It is somewhat unsettling that the most commonly cited form of board succession planning is a mandatory retirement age. That is not enough. Boards must consider the qualitative skills required to serve as a director, where people with such skills can be found and how they might be attracted to board service. Finding individuals who are willing to serve as board members is an increasingly difficult task, but not an impossible one. Proper planning will go a long way toward ensuring that your board of directors remains vital.