Passing the Torch

July 12, 1998, Saul Binder died suddenly of a heart attack.

News reports quoted Chicago- area analysts saying that without the flamboyant Binder, the chairman and CEO of Success Bancshares, they didn’t know what would happen to the $450 million institution. Frankly, neither did the board.

Saul Binder had been brilliant, says Glen Wherfel, vice chairman of the parent company board and a member of the bank’s board for the Lincolnshire, Illinois company. He had incredible energy, vision, and creativity. And he oversaw every detail of the bank’s operation personally, recalls Wherfel. “It was his one flawu00e2u20ac”the thing that rubbed everybody the wrong way.”

At 58, dying was the last thing on Saul Binder’s mind. And there was no succession plan.

“In hindsight,” Wherfel rues, “we know that was a big mistake.”

The ensuing days were full of activity. Inquiries from would-be acquirers began pouring in almost immediately, with bankers calling various managers saying, “What’s going on? I’d like to meet with you.” Others were more direct: “We want to buy you out.”

Projects that Binder had launchedu00e2u20ac”and that required his personal will to carry them outu00e2u20ac”were left dangling. Worse, the director, Sherwin Koopmans, and the chief loan officer, Christa N. Calabrese, who had been chosen to run the bank in the interim, both made it clear that they didn’t want the job permanently. “I don’t have the fire in the gut,” said Koopmans.

The board met several times in the weeks following Binder’s death and took a number of actions: They put two people in charge of running the bank and handling all calls from acquirers; they also created a succession committee comprising four board members, two from the bank level and two from the corporate level. Because the board did not want to draw attention to its predicament, the bank did not advertise for a CEO. Instead, the directors sought referrals through its two inside counsels. The decision was made not to look for another Saul Binderu00e2u20ac”they’d never find one anyway. Instead the board would seek an experienced banker from the community who had a talent for delegating.

After six months of deliberating over what began with 15 referrals, the full board hired Bank One executive Wilbur G. Meinen. The search was finally over.

The board of Success Bancshares learned a hard lesson. Now, if for some reason CEO Meinen must leave office, the bank has a new organizational chart with enough empowered department heads who could, if need be, step into the top spot.

Unfortunately, there are far too many banks that, like Success Bancshares, could find themselves in a similar predicament. Many have no formal succession plan and no mechanism for preparing managers to step up.

Ironically, in some cases, the CEO himself is the impediment. Paul Nadler, professor of finance at Rutgers University Graduate School of Management, says some CEOs just want to stay forever. “They think, ‘I don’t want a successoru00e2u20ac”I want the bank to be in such a mess when I’m gone that they appreciate me.’ They believe if the bank doesn’t have a succession plan, it will have to keep the CEO.”

Other times the board simply may want to avoid opening a can of worms. The process of examining who might succeed the CEO can start a war among senior managers vying for the position. Or it can spark a top management exodus if the board decides it doesn’t have a viable internal candidate and starts looking outside. As vexing as such problems can be, they loom much larger in the midst of a succession crisis. Thus, corporate governance experts advise all banks to put a plan in place before a crisis arisesu00e2u20ac”when customers, shareholders, and the media will be looking at them under a magnifying glass.

There are several common ways to start designing a plan. The CEO, preparing for his own departure, may take it upon himself to groom a successor. The board may make its own choice. Optimally, both sides tackle it together.

In CEO Succession, co-author Dennis Carey, a vice chairman of executive recruiter Spencer Stuart, touts Pittsburgh-based Mellon Bank’s succession plan as a shining example of “best practices.” One reason Mellon got the gold star, Carey says, was because former CEO Frank V. Cahouet prepared for his own succession by giving the board regularly updated reports listing who he thought should succeed him, including details on the candidates’ strengths and weaknesses. Carey also praises Cahouet’s ongoing dialogue with the board about how mergers would affect succession plans.

Current Mellon Bank Chairman and CEO Martin McGuinn says Mellon continues to use these two practices to ensure good leadership and maintain smooth management transitions. A starting place, he says, is simply to make sure that a company’s senior officers are getting leadership training. At Mellon “this process is not so precise or bureaucratic that every three months, they shift departments.” But prior to Cahouet’s retirement, the office of the chairman changed things from time to time, “seeing to it that the senior officers were developed by facing new challenges and responsibilities.”

Mellon also makes sure that the board is familiar with its senior managers. “The board is actively involved,” says McGuinn. “Electing a CEO is the most important responsibility it has.” According to McGuinn, directors ought to be asking themselves: “Do we have a process? Do we have it in place? [Are we] seeing and hearing about senior officers and others in the pipeline?” The board then can talk about people in management who might be possible successors. “They can discuss them in formal appraisals and informally over lunch or during breaks in a meeting,” McGuinn says.

In Mellon’s case, the board sought the recommendations of CEO Cahouet, whose opinion was well respected. Always in preparation for the unexpected, Cahouet delivered those recommendations every six months to the chairman of the human resources committee. Another practical tip: Cahouet’s recommendations were delivered in a sealed envelope, so as to prevent a rumor mill and horse race among executivesu00e2u20ac”an event that would assuredly disrupt the bank’s operations. The design of the plan paid off. By the time the actual succession event took place last January, the transition went off like a well-rehearsed performance.

There’s no question that having several senior managers-in-waiting eased the transition at Mellon. But despite the obvious advantages of time, money, and the hope for a more seamless transition, in recent years more companies have begun choosing CEOs from outside the company. Ten percent of Fortune 100 companies chose their current CEOs from outside, according to Spencer Stuart data. And in some cases, the breakdowns in loyalty between companies and their top managers have led some experts to speculate that it’s a waste of time and resources to cultivate leaders internally, when such training only makes them more attractive to competitors’ headhunters.

Carey disagrees with this logic, however. While it’s true that top officers may leave when the torch is passed, he maintains that a company can only gain by giving its managers the best possible leadership training. An analysis of inside versus outside candidates reported in the Harvard Business Review concluded that companies in crisis were better off going with an outside candidate; whereas companies that are not in crisis fared better, long term, from choosing an insider. In any event, when designing a succession plan, the list of insiders who could take over always should be calibrated against a list of outsiders to ensure that the bank is making the best possible choice.

For some community banks, looking outside becomes a foregone conclusion. This is especially true for boards that must turn the succession around quickly and are using as a chief criterion the experience of having previously run a bank of roughly the same size. That instantly cuts out most insiders. Of course, once you’ve found a candidate with the necessary experience, another factor that limits the pool for smaller institutions is how familiar he or she is with the community. Even with these obstacles, though, succession planning for small institutions can work.

Take People’s Heritage Financial Group in Portland, Maine. Company chairman William J. Ryan began the search for a new CEO for People’s Heritage Bank by canvassing area bank presidents. If that didn’t turn up a good CEO, he told the board, the bank would begin a formal search. Ryan’s objective: to find a talented banker who knew Maine.

“William Ryan has a good sense of who he respects,” says company spokesman Brian Arsenault. Ryan was delighted when David J. Ott, CEO of the Maine subsidiary of Fleet Financial of Boston, said he would be interested: He was well respected in the community, and he had run a large New England bank. Ryan presented his choice to the board.

“He advised them that he had a very attractive candidate, he told them why, and he said, ‘I think we have a great opportunity here. If you have any concerns, tell me now.’” That was about itu00e2u20ac”the whole process took less than six weeks.

For People’s Heritage, the issues were simple. There was no discussion of vision or mission statement or the future of banking. After all, Arsenault says, “Do we really have to make this complicated?”

Sometimes, though, making sure that a board and a new CEO are aligned makes all the difference. When the board of Maryland-based Annapolis National Bank needed a new chief executive, it hired one who seemed to have everything its previous CEO lacked. But it soon discovered the downside to this approach.

“We learned you have to be careful, at the time you’re making the change, not to jump at someone because he represents everything the last guy wasn’t,” says outside director Richard M. Lerner. Lerner’s certainly in a position to comment: As chairman of Annapolis National, he is also serving as interim CEO while the bank wages its second succession campaign in two years.

“With the previous CEO, it was clear to him, and to us, that we weren’t getting where we wanted with him, and he had run out of ideas,” Lerner says. “The new guy had strengths in areas where his predecessor was weak, and we hired him without examining what his weaknesses were.”

After less than a year in office, that CEO left because of disagreements with the board.

Now Lerner is personally paying the price. A founding member of Annapolis National’s board, Lerner has temporarily handed his construction business to his partner and spends 12 to 14 hours a day running the bank. The board hopes to name a successor by the end of the year. Like many community banks, the directors have set out two familiar criteria for the successor: The banker has to be talented as well as know the community. But for Annapolis National, there’s also a third critical component: The new CEO must share the board’s strategic vision for the future.

A boardroom decision that the CEO must go is an especially turbulent one. Nothing is more contentious than when a board must face the fact that new leadership is needed. And a bank in trouble needs especially strong leadership. Often, the board can correct problems within the bank by having a frank discussion of where the difficulties lie and whose leadership can help fix them. But this can cause friction if the current CEO is still in place.

Carey of Spencer Stuart offers a rule of thumb: If the current CEO is performing well, his recommendations for a successor should be given great credence. But if he is performing merely adequatelyu00e2u20ac”or even poorlyu00e2u20ac”the board should take matters into its own hands. However good this looks on paper, though, it is a tricky proposition to oust a current CEO who is a dominant figure in the bank.

Banks with a headstrong CEO sometimes choose an heir apparent that closely resembles the top guy. The former Nationsbank is a perfect example. The heir apparent to CEO Hugh McColl, Kenneth D. Lewis, has been described as being as aggressive, outspoken, and brash as McColl himselfu00e2u20ac”cut from the same cloth, some say. Except for a few months after the merger with BankAmerica, when it looked as though BofA CEO David Coulter would nab the top seat, Lewis has been the bearer of the mantle for years, having travelled with McColl from the bank now long merged into oblivion, NCNB.

At Kansas City-based United Missouri Banks, Rufus Crosby Kemper Jr. has earned a similar reputation as a domineering and outspoken CEO, though his persona has yielded nothing on the scale of McColl’s success. Kemper, whose family founded the bank he now chairs, treats the publicly traded bank as a family concernu00e2u20ac”justified by the amount of stock he owns, which is nearly 20%. He has been quoted in American Banker saying: “As the largest shareholder, I’m delighted and I wouldn’t fire me for anything,” and “For years, I’ve had new people tell me I didn’t know how to run a bank. Every one of them is either in prison, dead, or out of the business.” Famous for firing or demoting executives who get too close to the throne, Kemper has recently elevated his 33-year-old son Alexander to the position of CEO of the holding company.

Though United Missouri’s stock performance has been lackluster, Kemper is rarely openly criticized for his decisions. Not by outsiders and not by the board. As Joseph Steiven, senior analyst with Stifel Nicolaus in St. Louis points out, most of the board members are personal friends or relatives of the Kempers: “You don’t get criticized too much around your own dinner table.” (Kemper did not return our phone calls requesting an interview.)

Where he has been criticized is in not retaining talented senior executives whom observers deem worthy of being in line for succession. Experts say banks such as UMB can make the mistake of failing to hang on to good people because their sights are set in the wrong place. Rutger’s Paul Nadler says it’s unfortunate to see a company that has someone who seems an obvious choice, only to put him in a category with all other contenders. The company runs the risk of losing someone valuable.

That almost happened at Six Rivers National Bank in Eureka, California when the board had to appoint a successor to its CEO, John F. Burger, who was forced to step down because of bad loans. Michael Martinez, CFO of the $200 million bank, had worked at Six Rivers for more than six years. He was named interim CEO and figured he was the logical candidate. “There were steps being taken to groom me, such as sending me to banking school and having me work in different aspects of the business,” Martinez says. “I was also grooming myself for the position.” But Martinez was only 38, and the board, he says, was “looking for comfort in a gray-haired CEO.”

The board launched what Martinez called “a very tough, very thorough process” of interviewing outside candidates. For seven months while the board searched, the bank hung in limbo.

“During this time we revamped the commercial lending team,” Martinez says. “Everyone I interviewed asked, ‘What’s going to happen? Who’s going to be the final guy?’ People would ask, ‘Why is the board moving so slowly?’” Martinez ruefully explains that a lot of people knew he wasn’t a member of the board and, as such, “didn’t carry the weight” of a CEO.

The bank then became a takeover target of a neighboring bank. To Martinez’s chagrin, discussions were carried out between that bank’s CEO and Six River’s chairman.

Eventually, the board decided that Martinez was indeed the logical choice. But for a time afterward, relations between him and some of the board members were strained. They’d communicated little with him about who they were interviewing or the outcomes of those interviews, and the information he did uncover told him that some directors had little confidence in his ability to handle the job. To help smooth such transition periods, George E. Davis, senior vice president and director of corporate human resources at Lincoln Financial Group, a financial services organization in Ft. Wayne, Indiana, recommends that a company appoint a board member to mentor the new CEO through his first year.

Now, 18 months later, Martinez says both he and the board are beyond that. However, the bank still has no written succession plan, although Martinez believes it would be a smart move to implement one. There’s no question who his successor would be: 60-year-old chief credit officer Sheldon Francis.

The potential loss of good people during the succession planning process is, as many bankers put it, part of the territory. It is inevitable that some executives will, once they are passed over, look for greener pastures. Some may rightly feel that their days are numbered anyway, since a new CEO may bring in an executive staff that is hand-picked.

But while succession planning means taking the risk of losing good people, it also means taking the opportunity to plan for management retention. McGuinn at Mellon Bank says that the bank’s philosophy at the time of Cahouet’s retirement was to look at the process not just for the CEO alone, but for the succession of the entire management team.

“You always worry about keeping those people,” McGuinn says. “In this process, there’s more than one talented person. When you have a team and you work together well, you want to keep them. There’s not just one successor; we’re a leadership team.”

But lest that fail to convince some managers with their eyes on the prize, Carey recommends vesting executives heavily with stocks, stock options, and the like. Otherwise they become ripe for headhunters’ picking. “If you have an executive you cannot afford to lose, you should do everything possible to handcuff that executive with stock options and restricted stock.”

The crucial responsibility for directors, however, is to make sure a well-thought-out plan is in place. Ultimately, Nadler points out, boards and CEOs will be remembered not just for what they do, but for what they leave behind.
And without a succession plan, what they leave behind could turn into a real mess.