Exit Strategy

CEO-Succession-4-17-19.pngEarly in 2018, Mark A. Turner, then-chief executive officer of WSFS Financial Corp., an $8 billion asset bank based in Wilmington, Delaware, shared in the company’s annual report what he hoped would happen to the 187-year-old bank if he were to keel over in the corner office. This was about six months before it was announced publicly that a designated successor had been chosen to replace him.

“I have on occasion said, ‘If I go into a coma, I hope the company misses me, but it doesn’t miss a beat,’” Turner wrote. “For that to be true, we, and no organization desiring to be long-lasting, can be ‘person dependent.’”

While Turner’s hypothetical scenario was indeed grim, it’s one that bank boards must seriously consider. The succession of a chief executive should be at the top of the priority list for any bank’s board of directors.

Turner and other bank CEOs who have transitioned into or out of the top job say the process is much more about the bank and its future once they’ve left than it is about themselves. It is many times led by the sitting CEO but includes essential oversight and involvement from the board.

Ideally the process should be managed by the independent directors on the board’s governance or nominating committee, with input from the outgoing CEO. And even if the current CEO is years from his or her expected retirement, there should be a process in place to nurture younger managers who one day might ascend to the CEO’s position.

Turner says it’s important to avoid becoming “cult-like,” where the organization becomes enraptured under one all-important leader. “The best way to avoid this fate is to continually embrace new ideas, including opposing views, to develop new leaders with new styles, and to actively plan for the next generation to be more relevant and better than the current one,” he says.

That’s exactly what Turner did at WSFS. More than five years before the succession was publicly announced in mid-2018, Turner met with his eventual successor-Rodger Levenson-and told him he was under consideration to be his replacement. Levenson, who officially took over as CEO on Jan. 1, 2019, joined WSFS in 2006 as chief commercial banking officer and later became the company’s chief financial officer.

“Subject to further conversation, obviously, with the board, [Turner] would remain CEO for about five more years, and it was his thought and his plan that it would be a very well thought-out transition,” Levenson says.

Levenson describes Turner as methodical, noting that Turner “personally believes very strongly in having deadlines and goals and working toward those schedules, and it was the only way that he was going to be able-particularly considering that he’s younger than I am-to force that conversation and make it happen for himself and with the board,” Levenson adds.

What came after that initial conversation was a detailed and intensive process for everyone-Turner, the board and especially Levenson. He created his own development plan with objectives for one and three years out after seeking input from Turner and the board. He became more involved in the bank’s M&A activities, took personal development courses, sought feedback from his peers, the board and direct reports, and spent a week in an intensive leadership program at the Center for Creative Leadership at the base of Pike’s Peak in Colorado Springs. After that, Levenson worked with an executive coach, a common practice for senior managers at public companies who will have to make disclosures and public statements regularly if they become a CEO.

Then the real work started, when the transition became more formalized.

According to Levenson, “Mark came to me and said, ‘We’re a few years out. We’re either going to go with you, as the only real internal candidate, or go into an external process,’ which was obviously not [the board’s] preference, ‘And this is what that would look like.’”

Levenson met with the full board and then individually with each director. He was elevated from CFO to the chief operating officer in the summer of 2017, so he could gradually pick up Turner’s day-to-day responsibilities. Although an official announcement wouldn’t come for another year, the title change subtly telegraphed to the market that a succession plan had been put into motion. Other banks have used such a tactic before.

“Everybody knew [then] that this transition was in play, the organization got the sense, the street got the sense, and so I spent the better part of that 18 months working on starting to lay the foundations for the changes that I wanted to make to the team,” Levenson says. “I started executing on those, and then in the summer of 2018, it went back to the board, and it was all going according to plan, and they officially approved the decision to move me into the president and CEO role on Jan. 1.”

How CEO succession was handled at WSFS is seen as a model for other institutions because of its structured and methodical process.

“It’s picture-perfect from the standpoint of how it should be handled,” says Rusty Conner, a partner at Covington & Burling LLP, a Washington, D.C.-based law firm that has worked with WSFS before.

The key ingredient is time. Conner says that allows all essential parties the chance to prepare and make thoughtful decisions about the succession process.

“It’s a combination of the board asking questions annually, being a part of assessing the overall challenges of the organization and developing a program with the CEO to make sure that younger management officials have the opportunity to develop the expertise they need to assume the position of the CEO. It’s a multi-faceted approach to developing something on a timely basis,” Conner says.

Without a reasonable amount of time, a board could find itself restricted to the existing pool of talent within the bank and could be forced to elevate someone to an interim role to gain more time-or perhaps hastily search for an external candidate who might be able to handle the responsibility of running the institution. A thin talent pool or abbreviated timeline can even lead to the sale of the bank as the remedy to a CEO succession problem.

No board wants to be forced into choosing a replacement for the CEO without advance notice, says Alan Kaplan, CEO and founder of Kaplan Partners, an executive search firm based in Philadelphia, Pennsylvania.

“We see too many situations where the CEO would not communicate a timeline or intention or a plan with the board of directors, and it can be a little bit frustrating because they don’t want to be caught by surprise,” he says.

Kaplan provides boards with his version of an ideal timeline they can use to plan and develop a schedule for succession. That timeline maps out 36 months of strategic planning, board assessments of the executive team and other important points in the process. But Kaplan says it all starts with strategy and the direction of the franchise in the future.

“What’s the blueprint [the bank is] going to be looking for?” Kaplan says. “Strategy informs profile. What do we want to be, and who do we think we need over the next three, four, five years directly impacts the profile of the executive that gets them there.

Boards should have that conversation once a year, according to Peter Crist, formerly the board chairman and now chair of its governance and nominating committee at Wintrust Financial Corp. in Rosemont, Illinois, just outside Chicago. Crist, also the founder and chairman of the executive search firm Crist Kolder Associates, says that two potential scenarios should drive board level discussions about succession.

“One is the hit-by-the-bus scenario, where a board needs to be ready for that and why it has to go through this conversation every year,” Crist says. The other scenario is when the CEO is having “a normal, natural career life, does really well, the institution does really well, and then we just have to find out as soon as they get to their twilight years how we are going to handle a long succession cycle.”

“All the scenarios have to be played out at the board level every year, because you have to prepare yourself for the bus,” Crist says.

The average CEO tenure among S&P 500 financial services firms is 9.4 years, according to a report by the Crist Kolder firm. Other industries in the report-industrial and energy firms, for example-average less than 5.5 years, which is consistent with the average tenure of all CEOs.

It’s a different story for community banks, which tend to keep their CEOs for 10 to 12 years on average, Crist estimates. Banking is a consolidating industry, and with fewer banks come fewer CEO spots. When paired with longer-than-average tenures at the top, that complicates the succession and talent challenge. For one thing, it can be more difficult to keep a potential successor in the organization if the current CEO sticks around for that long.

“Look at JPMorgan. How many No. 2’s have exited in the last five to 10 years because Jamie’s been in the chair,” Crist says, referring to Jamie Dimon, CEO of JPMorgan Chase & Co.

“That, to me, is just a phenomenon in the banking space-it’s neither good nor bad,” says Crist. “There’s a longer cycle for them that you’re going to pay attention to, and as long as the bank itself is doing OK, there’s less pressure for change.”

There is also less outside pressure at private and mutual banks, in part because they don’t have the same disclosure requirements as public companies. Nor do they face pressure from sophisticated institutional investors who will call out a board they feel doesn’t have a handle on the succession issue.

“The visibility of that information often drives conversations and makes boards have to deal with those issues when they’re public,” Kaplan says. “In the absence of any external pressure or agitation, or even just of asking the question around executive succession, it becomes more incumbent on the board of directors to step into their fiduciary duty of who leads the organization.”

Family-owned institutions face a similar scenario, which is further complicated by the family dynamic. “The challenge is there is always a sort of unspoken qualifier” about whether the familial successor is ready and capable of taking over, says Kaplan. But there is a solution to this. “When you want to perpetuate ownership of the company and not kill the golden goose, then you must, as a family, separate economic control from operating control-who owns the company from who runs the company,” he explains. That would mean using nonfamily management while someone from within the family maintains an executive chairman role or other board-level leadership title.

One way to force boards to focus on succession is to implement a mandatory retirement age. Lakeland Financial Corp., a $4.9 billion asset bank headquartered in Warsaw, Indiana, has long required its CEOs to step down at age 65. The bank’s current CEO, David Findlay, says the retirement policy works because “that’s the right structure for continuity and good corporate governance.

Lakeland’s previous CEO, Mike Kubacki, turned over the job to Findlay in 2014. Findlay joined the bank as CFO in 2000 and later became president in 2010, four years before Kubacki retired. But Kubacki didn’t exactly leave the bank. Lakeland retained him as executive chairman as part of its succession plan. A retired CEO maintaining a role on the board might be a challenge for some heir apparents, but it hasn’t been a problem at Lakeland.

Findlay and Kubacki both had stints at the Northern Trust Co. in Chicago before coming back to their home state to run the bank.

The philosophy behind the mandated retirement, which also applies to board members at age 72, is about avoiding unnecessary wrangling with the current CEO.

“It really sets the stage for, I think, a logical approach to retirement and succession,” Kubacki says. “It avoids the situation where the aging CEO says, ‘I still feel good, I still think I can do the job. I love the job, and I don’t want to go.’”

“It’s certainly not a judgment that mental faculties decline at that age or anything like that,” Kubacki says. “We pay a lot of attention to values, one of them being stewardship. The idea that the bank was around a long time before we got there, and if we do our job well, it’s going to be around a long time after we all leave.”

The longevity of the institution beyond the current leadership team is also behind the succession at $32 billion asset Cullen/Frost Bankers in San Antonio, Texas. Frost has a storied 150-year history, which includes surviving the energy crisis in the 1980s. Phil Green became just the seventh CEO in 2016, succeeding Dick Evans, a legend in Texas banking for his no-nonsense style-and for being the first CEO at Frost without the Frost namesake.

The board was shocked when Evans informed it in the summer of 2014 that he was planning to retire. So much so, in fact, that some thought Evans was terminally ill. He wasn’t, but had been considering retiring for some time and deemed the time was right for the institution to have fresh leadership.

“I began to explain to them that there were 10 of us that were in executive management, and half of them, including me, were getting a little long in the tooth, and I didn’t think it was right for me to build the next executive team and then hand my team over to a new CEO,” Evans recalls. “I thought it was important that he get to build his own team, and that’s exactly what Phil’s done, which I’m happy with,” Evans says.

Green had been the CFO at Frost for nearly two decades, making him an easy choice to succeed Evans. Evans first delivered the news he wanted Green to be the next CEO at lunch with just the two of them after Green returned from a vacation. Evans brought a yellow legal pad with him to the meeting, which Green thought would be filled up with a to-do list.

“Then halfway through lunch, he said, ‘I’d like to talk to you about making you CEO of this place.’ I remember my reaction like it was yesterday. I said, ‘What did you say?’ He talked about what his plan was, and why now was a good time and what he wanted to do,” Green recalls.

Green was given the title of president, which was a new title at the bank, and became a close understudy of Evans. The transition was more than two years in the making, with Evans slowly shifting responsibilities to Green.

“I knew there were things that I needed to prepare myself for in that role. It gave me time to do it, and … I think it gave the organization time to begin adjusting to change,” Green says.

Evans retained a “veto” authority on a handful of decisions, Green says, but otherwise the bank was Green’s to run. It was the same process Tom Frost used when Evans transitioned into the CEO’s role, and it was Evans’ gift to Green.

“I think it’s really important in any transition that once you make that decision that the person (coming in) changes their role,” Green says, who gained experience beyond the CFO duties as president. “That’s what Dick did with me.”

The lesson that can be gleaned from the succession experiences at WSFS, Lakeland and Frost is that organizations benefit greatly from an orchestrated, collaborative transition of power.

“It’s because we’re all smarter together than just one guy playing King Kong,” Green says.

Jake Lowary

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