10 Steps to Selecting a New CEO

Eventually, every financial institution will find itself in need of a new leader. Over the period of a decade, sometimes less, it usually becomes necessary to hire someone to replace the current CEO (or president). The reason may result from mandatory retirement due to age, illness, or even be occasioned by resignation, but regardless of the cause, change always seems to happen when it is least expected. Suddenly, the board is thrown into the complicated process of searching for a new chief executive.

How do you start the process? Will certain procedures make the process more efficient? Since this topic can become extremely broad in nature, let’s establish a few assumptions:

– The bank or thrift has a CAMELS rating of 1 or 2 and, therefore, no regulatory restraints against free selection of a new CEO by the board of directors.

– The bank or thrift is not under a memorandum of understanding, a cease-and-desist order, or any other administrative order that would affect the free selection of a new CEO.

– The current CEO is not under indictment for any felony, nor has he or she been found guilty in a court of law of any felony, including such civil actions as bank fraud, mail fraud, RICO, etc.

– The current CEO has resigned, retired, or become unable to fulfill the obligations of the position.

– The financial institution is not a family bank or thrift, thus there are no individuals from the second or third generation waiting to become the new CEO.

– There are no internal factions within the board, and shareholders are loyal, complacent, and pleased with the return on their investment.

Assuming that the above conditions are true, what must be done in order to select a new CEO when the circumstances require it? The first step is to realize that a new chief executive is needed.

Step 1: Deciding to recruit a new CEO

Sometimes the board of directors has failed to see that a new CEO is needed, especially if the current CEO is physically or mentally below par. It is possible that the board may let such a rudderless situation go on for too long before recognizing the need to improve the efficiency of the financial institution’s leadership.

How long is too long? That depends on the type of executive management at the bank or thrift. If capable senior management supports an ailing CEO, it is possible that the board of directors or trustees can wait a few months to determine whether he or she is going to return. The board must realize, however, that the CEO may never return. After examining the executive’s medical prognosis, the board must take action accordingly.

No matter what the cause, when a new CEO is needed, the recruitment process could take three to six months, and the more time that is lost at the beginning, the more time it will take at the end. Mistakes take time that cannot be made up. If for some reason the CEO does return to health, it is best to find another suitable position, such as vice chairman or executive vice president, that will allow him or her to finish up a career at the financial institution. In doing so, you can continue to capitalize on that person’s talents, expertise, experience, and contacts.

Step 2: Implementing the internal solution

Without a doubt, the ideal solution is to have a CEO successor currently on staff. As directors, you are responsible for management succession at the top level of your financial institution. So if you have done your job correctly, a viable candidate is already inside the financial institution, probably even the number-two person in management. Therefore, if the current CEO dies, becomes totally or partially disabled, is ill for a considerable period of time, or takes a job elsewhere, the number-two person can immediately be appointed as the new chief executive. The only issues that will need to be determined are salary, job title, and fringe benefitsu00e2u20ac”a minor inconvenience compared with filling a gaping hole if there is no one on deck.

If this situation occurs, it would be wise to start the process immediately to find a backup for the newly chosen CEO, especially if he or she is already age 55 or older. If the new CEO is 40 or 45 and in excellent health, then it is a great opportunity for the board to develop and implement a more systematic management succession program.

Step 3: Considering the local solution

Perhaps you know who the new CEO is going to be, but he or she is not currently working for your financial institution. Let’s call this the “local solution.” The individual may be a senior officer in a competitive financial institution in town or in the banking market. he or she might be the son or daughter of the current CEO or another major officer or close relative of a significant shareholder, who has grown up in the local banking market and is now a professional banker just waiting for the opportunity to come back to town and head your financial institution. This local solution provides continuity to the community bank/thrift philosophy of operation in many small towns. This alternative generally becomes necessary when the board has decided that the current CEO does not have backup internally. You may have capable, productive members of senior management, but, for various reasons, they may not be appropriate choices for successor managementu00e2u20ac”because they are almost retirement age themselves, have the wrong personality or functional skills, or simply do not want the stress, headaches, and responsibility placed on the chief executive.

Step 4: Moving forward: developing a pool of candidates

The board should set up selection procedures at the policy level with appropriate steps to be implemented if the occasion arises. For example, if the CEO dies overnight of a heart attack or is lured away by a competitive financial institution, the first thing to remember is: Do not panic. When a bank CEO dies or leaves, the directors may be in total shock and disarray which could lead to a decision to sell the financial institution. Moreover, when a managerial calamity takes place, aggressive acquirers will seize the opportunity and try to convince you to sell. If you want to sell, that is often a legitimate strategy. However, do not sell simply because the CEO is gone. The shareholders elected the board of directors to supervise and monitor the operations of the bank or thriftu00e2u20ac”not to sell the company.

It behooves your board of directors to look for a replacement in an orderly fashion. That is why the board should outline procedures in advance, in the event that a new chief executive must be located. The real question is, where can the right person for the job be found? Should an outside headhunter be retained to assist in finding a new CEO, can industry contacts be utilized, or can you simply look around the banking market and see if there are potential candidates at other financial institutions? All of these are possibilities.

Retaining an outside recruiting firm

If there is no internal candidate, if an external candidate is not making his or her presence known in the marketplace, if the board does not have a replacement CEO in mind, then an outside executive recruiting firm may be not only the cheapest solution in the long run but also the most efficient. Executive recruiting firms have the right contacts. This is especially true if the board of directors does not include professional bankers and does not have extensive contacts within the banking industry. There are many competent executive recruiting firms that can provide suitable candidates. Contact two or three such firms ahead of timeu00e2u20ac”it is best if they are already known to the board and a search from scratch is not necessary. This is a part of the board’s planning responsibilities that should already be in effect.

Each prospective recruiter should submit a proposal. A representative from the recruiter should be interviewed by a committee of the board or by the entire board, depending upon how you decide to handle the situation. Executive recruiting services are not inexpensive, but at this point, your board of directors does not have the luxury of time or the ability to do the job effectively, so a recruiting firm becomes far more valuable in finding a replacement CEO.

In most cases, publicity concerning the search for a replacement is not a problem, especially if the former CEO has retired or passed away. In fact, when replacement is inevitable, the more publicity the better. If, however, the former executive has left under less than favorable circumstances, the recruiter may be instructed to perform the same services but without the national or regional advertising and publicity surrounding a formal search. This decision can only be made on the basis of individual circumstances. Experience has shown that conducting a national search for a community bank or thrift CEO is not cost effective.

Another issue that should be seriously considered in the recruitment of a new CEO is community compatibility. The board needs to be realistic when considering how a potential executive might view your community. The candidate and his or her spouse must be persuaded that the career opportunity includes the quality of the community itself. This may mean offering above-average remuneration and significant stock options to help convince the candidate that the opportunity is beneficial to the welfare of the family.

Pursuing director contacts

If the board includes several members who have experience as professional bankers or who actively participate in the community served by the financial institution, they may be in a better position to locate suitable CEO candidates. Again, establish a committee of the board and let those individuals contact potential candidates. It might still be beneficial to retain the services of an executive recruiting firm to assist in the overall process or, alternatively, to utilize specialized legal counsel to protect the bank from making mistakes that are outside the knowledge of the board of directors.

Utilizing trade associations and other industry sources

Typically, banks and thrifts have attempted to replace their CEOs by contacting their state or national trade associations for CEO ru00c3u00a9sumu00c3u00a9s on file. In periods of high unemployment, plenty of ru00c3u00a9sumu00c3u00a9s are circulated and in periods of prosperity, there are few. Remember, the pool of candidates may reflect those who are unemployed (often for good reason), not necessarily those just looking to change career opportunities. Only rarely does a highly qualified, currently employed senior executive provide his or her ru00c3u00a9sumu00c3u00a9 to a state or national trade association. You may also find out about potential candidates by talking to executives at the trade associations who know those who might be interested but do not have a ru00c3u00a9sumu00c3u00a9 on file.

Keep in mind that if a candidate has been out of banking for three to five years, they will not pass regulatory scrutiny. You are far better off hiring someone who is currently employed in a bank as an executive vice president or senior vice president than attempting to bring someone out of retirement who had an excellent reputation but is not up to date on what is going on in the banking industry.

Another source equivalent to the trade associations is the professional banking consultant fraternity. Many banks and thrifts have regular contact with CPA firms that offer a full spectrum of services and bank consulting firms that provide custom-tailored executive recruiting services. These can become viable alternatives to contacts with state and national trade associations and may allow recruiting to be conducted by the directors themselves.

Step 5: Vetting the candidates

The next step is to vet the possible candidates before the board ever meets or interviews them. The board should request detailed ru00c3u00a9sumu00c3u00a9s from the candidates that include their educational backgrounds, current addresses, social contacts, and career accomplishments as a banker. Most important, they should provide three to five references regarding their banking qualifications, not just social references. If candidates are reluctant to provide references unless they have been scheduled for an interview and offered the job, thank them and go on to the next candidate. Check the references of the candidates before wasting everyone’s time bringing them in for an interview. It will cost you time and expense to have them in town with their spouses, and it will cost the board time and money working with an executive recruiter or consultant to determine a candidate’s suitability.

It is incumbent upon the candidate to ensure that his or her references know that all information is to be kept confidential. The board should have no problem keeping the information confidential, and it is not required to disclose the list of candidates. This is in contrast to state universities or other public organizations that must disclose candidates during the interview process, leaving them open to censure at their current employment positions.

Now for the biggest problem in selecting a new CEOu00e2u20ac”talking to the references. It is incredible the number of boards that do not contact references even when they are furnished. If references are contacted, the selection committee often does not do so until after the candidate has been hired and is already on the job. At that point, any comments made by the references are meaningless.

Once you do get feedback from references, give it the credence it deserves. I once received a letter from a university Ph.D. finance program representative indicating that one of my former students wanted to enter the program. He asked me whether I would recommend the student for Ph.D. status. I responded, clearly indicating that I had caught the individual plagiarizing his MBA thesis and that I had refused to graduate him from the program. Needless to say, I did not recommend the individual. Several years later, I received a frantic call from the administrator of the Ph.D. program explaining that someone had finally read the file and my negative recommendation. They had brought the young man into the program and, you guessed itu00e2u20ac”he had plagiarized his Ph.D. dissertation! References should be checked and read carefullyu00e2u20ac”even between the lines.

You should talk to the references after interviewing the candidates. Ask them to provide other references. Listen carefully to what the references have to say. Some will give glowing recommendations for an executive who was just shown the dooru00e2u20ac”so you must be very careful.

Likewise, check the appropriate bank regulatory agencies to see if there is any negative information concerning the candidates. This is important regardless of whether you need to obtain a regulatory agency’s approval to hire a new CEO. If the candidate has recently worked for a national bank, you can check with the OCC to see if it has any negative reaction to the candidate. The same would be true for the state banking agency if your organization is a state bank or thrift.

If the individual is out of work, your reference check should be doubled in intensity. You need to know exactly why the individual left his or her previous employment. There are countless situations where the candidate is perfectly appropriate for a banking institution and has left a previous employer due to philosophical differences, or perhaps a reluctance to participate in what he or she considered to be inappropriate conduct. On the other hand, if a financial institution fired the individual because the board or management believed he or she was a poor-quality lender or there were other issues concerning performance or personal ethics, that is an entirely different situation. You certainly do not want to bring a candidate on board and have them around for three months until you receive an anonymous call telling you that the Don Juan of banking has just been hired by your bank. Again, if something doesn’t smell right, there is probably a reason.

That brings up another point. You really should conduct a background check on each candidate. There are private companies that will do the equivalent of an FBI check. If background vetting indicates ru00c3u00a9sumu00c3u00a9 discrepancies, then this is indicative of the character of the individual being analyzed.

I am not presuming that candidates should be perfect. None of us are, but as directors you should know about any warts. You do not need any surprises once you have hired the person and put them to work. You are better off doing a second check on the candidate you want during the negotiation stage, to make sure that you haven’t encountered a banking professional whose career is not appropriate to the requirements of the board of directors.

Step 6: Interviewing the candidates

Candidates should be interviewed on the basis of their abilities and not their gender, race, or age. The attributes that are most important are innate qualities, experience, expertise, interpersonal skills, and the ability to work within the community. Unfortunately, many boards enter the selection process with a stereotypical image of the new bank CEOu00e2u20ac”usually someone who resembles the former chief executive. To conduct a legitimate executive search, you should shatter that kind of mindset prior to any negotiations for the new CEO.

Furthermore, do not end up with just one candidate. Even if you think there is one candidate who is head and shoulders above all the others you have vetted, interview at least three. I say that because for all of the interviewing I have done in my years as a professional consultant, I have often been surprised that when my choice went head-to-head with the others, my candidate fell short. It is possible to go through a total interview sequence, including reference checks, and still be wrong. If you interview more than one candidate, and compare and contrast them with each other, you may learn some things that you would not have learned any other way.

Preferably, the entire board of directors should meet with each candidate for an hour or two in a formal environment. That is not to suggest that afterward the board should not spend a more relaxed period of time with the candidate and spouse, which is certainly appropriate. However, an interview that creates a level of stress in a professional environment where the candidate provides a 15-minute discussion of background, credentials, talents, assets, liabilities, etc. will give board members some insight on how the candidate handles such situations. It is best to use the same format and discuss the same issues with every candidate to get a better overall understanding of the pool.

This process will take time. It is a mistake for the board of directors to think that it is possible to hire a new CEO without spending 30 to 60 hours of the board’s time. If you are not prepared to spend the time, resign from the board.

An interview schedule must be developed that permits all members of the committee to be involved. That is the only way to compare the first candidate with the 12th candidate and all the candidates in between.

When the full board meets with the final candidates, all directors must be present. Senior management members should be asked for their input as well. In fact, it would be inappropriate not to solicit their input unless secrecy is required.

Step 7: Utilizing professional assistance

Most banks and thrifts do not possess a sophisticated board of directors when it comes to handling the pitfalls and legal entanglements of human resource management. For this reason, it is highly recommended that the board utilize appropriate outside professional assistance when hiring a new CEO.

The bank’s vice president for human resources assists the CEO and senior management in hiring, firing, retaining, penalizing, and rewarding the employees on staff. The board needs to make sure that the recruitment process, negotiations, and contractual arrangements are legal and binding and do not lead the bank and board into potential litigation.

Maintaining D&O insurance coverage is important. Retain the services of a financial institution consulting firm, a specialized executive recruiter, legal counsel with a focus on financial institutions, or the consulting arm of your CPA to assist in making sure that all policies, procedures, negotiations, and conclusions reached in the employment process are appropriate.

Step 8: Negotiating the deal

Before negotiating an employment agreement with the new CEO, there are a few issues that need to be addressed. Many times, the board of directors of a bank or thrift has certain attitudes and biases connected with hiring a new chief executive.

For example, the board of directors might mistakenly believe that a new CEO can be hired for the same amount of money as the one who just retired, died, or left town. Realistically, a new bank CEO is going to cost more than the last one, regardless of how good the last CEO was. Chances are, the former CEO received less than market value for the past five to 10 years, and if his or her replacement is to be of value today, you will pay market or above market to get that person. Indeed, the price paid to retain a new bank CEO has absolutely no correlation with the previous cost. There are consultants that determine peer group salaries, not simply what those in your county or in your banking market are paying. As a corollary to this bias, it is often true that the board of directors simply does not understand how much it costs to hire a chief executive and how much a CEO is worth. Furthermore, the individual should be paid an amount commensurate to his or her experience and responsibilities, and the compensation package should include not only salary but appropriate fringe benefits.

When you reach the negotiation stage, remember that negotiations today demand far more attention than in the past, and they do not come cheaply. This is where outside professional assistance should be utilized. At this stage, one individual from the board of directors should be delegated to negotiate with the final candidate. Do not, however, broadcast to the other candidates that they are no longer in the running until the chosen candidate signs a deal. If a negotiated agreement concerning financial and nonfinancial aspects of the individual’s employment with the financial institution is not finalized, there is no deal. Enter into negotiations quickly and efficiently so that the second- and third-choice candidates do not disappear until you can tell them that an agreement has been reached.

It is imperative that the board enter into an employment contract with the new CEO. An employment contract sets forth the foundation of the arrangement between the bank and its new CEO and determines the core responsibilities vis-u00c3 -vis the board of directors, management, and the staff. Rights, privileges, responsibilities, rewards, and punishments are outlined in the employment contract so there should be no question about who is responsible for specific areas, what actions will be taken in the event of a failure to perform those duties, or the grounds upon which the CEO is either rewarded or terminated. An individual willing to come to work for the bank without an employment agreement is very likely not worthy of serving as your new chief executive.

An employment contract consists of much more than simply the number of years and the dollar amount. Fringe benefits become crucial, such as stock options, retirement programs, country club memberships, use of bank cars, education and training, moving expenses, and so on. It is not recommended that every demand by the candidate be met since the process is called “negotiation,” not “surrender.” On the other hand, it is beneficial to be mindful of the market conditions for hiring a bank CEO. This is why retaining the services of an outside human resource professional and legal experts will ensure that the employment contract is fair and favorable to both sides in the negotiation.

One final note: On occasion, the board will consider an executive vice president or senior vice president as a candidate for the position of CEO, perhaps as part of a succession plan. It is not uncommon for the board to believe that a particular individual who has been with the bank for a long time will not demand anything unreasonable. Do not be nau00c3u00afve as a board of directors. Even if you select a candidate who lives in your town, be prepared that his or her negotiations will be just as sophisticated and expensive as those of an outside candidate.

Step 9: Coming on board

It’s down to the wire but the process is not complete. The successful contender has been selected as the new chief executive and an employment agreement has been signed. The other candidates have been contacted and thanked, and their expenses have been paid. The bank has a new CEOu00e2u20ac”but nobody knows about it yet.

Earlier in the process, the candidate may have been introduced to the staff while being interviewed by the directors. That would have been a good idea, but it is not a requirement. In some cases, the selection of a new CEO may take place while the current CEO is still in office and sometimes, even without his or her knowledge. There may be legitimate reasons why that might happen.

Assuming the staff knows who will be named the new chief executive, the announcement should be relatively routine, but it but still deserves special attention. The bank’s marketing staff, its advertising agency, or a marketing firm should prepare a press release. The announcement should be released first to the staff, then to shareholders, and finally to the general public.

A welcome reception is a great way to introduce the new CEO and spouse to the staff of the bank, the shareholders, and those within the community. Making a formal introduction permits everyone to separate the new CEO from past associations and crowns him or her with new attributes and responsibilities.

Step 10: Wrapping up the search process

Once the new CEO is hired, do not disband the board committee too quickly. First of all, it’s always possible that the new arrangement may not work out. Keep the committee alive for at least three to six months to make sure that the transition is going smoothly.

Second, if one of the other candidates under consideration was an employee of your financial institution, make sure that the unsuccessful internal candidate has accepted the conclusions of the recruiting process. Make sure that the internal candidate knows why he or she was not selected. If there is a problem, perhaps it can be worked out before it becomes a disaster. Remember, it is the CEO’s job to hire subordinate senior managers, but the board can offer assistance in helping the transition go more smoothly by understanding the feelings of an unsuccessful candidate.

Third, make sure that all forms, contracts, expenses, and bills connected with the search process are completed and paid by the financial institution. If an outside recruiting firm was retained, check to see if the agreement contains a guarantee for a specific period of time before the recruitment process is closed. It is not unusual that when a newly hired executive leaves within the first year, a recruiting firm will assist in the process a second time for expenses only. At a minimum, be aware of exactly what options are available from the executive recruiter or the financial institution consulting firm in the event that further assistance is required.

Fourth, make absolutely certain that all candidates have been thanked for their professionalism and their interest in your organization. Make certain that all their expenses have been paid and that all state and federal trade association representatives, regulators, consultants, and others who were contacted know that the financial institution appreciates their assistance and has successfully recruited a new CEO. You never know when you might need the same contacts again due to the departure of the new CEO or the need for another significant senior officer that cannot be filled from inside the financial institution.

Only when all these items can be checked off should the special committee of the board be disbanded. At that time, all information generated can be entrusted to human resources or, preferably, the corporate secretary to be kept under confidential lock and key. There is no reason for the new CEO to learn anything about the other candidates, nor should information be shared on how he or she stacked up against the others. On the other hand, the information should not be destroyed, but retained in the event of any future litigation.

A final word: learning from the recruiting exercise

One of the most important aspects in the recruitment of a new CEO is to learn from the experience so that it can be improved upon the next time around. As directors of the financial institution, you will be required to recruit candidates again in the futureu00e2u20ac”the only real question is when.

At the beginning, I said the easiest way to recruit a new CEO is to have a candidate available within the financial institution so that his or her ascension to the top office is a slam-dunk. And the easiest way to make that happen is to make sure that the management of the financial institution is bolstered with suitable subordinates who provide a level of depth to management succession.

If this is not achievable at your financial institution, your board can learn how to efficiently recruit a new CEO. Since the same individuals may not be on the board the next time around, it is essential to document the candidates contacted, those who demonstrated value, those who said they would assist and did not, and those to avoid.

If the selection process included the use of outside professional consulting, legal counsel, or the services of an executive recruiter, you should expect the firm, as a part of its engagement, to provide a final memorandum on the best practices for executive recruitment. This means that the next time the financial institution finds itself in the position of looking for a new CEO, it should not be necessary to reinvent the wheel. The exact methodology utilized may not be applicable, but the entire process will be available in writing to help you develop procedures for the next time around.