Using the Succession Plan to Evaluate Talent
Boards have many duties, from overseeing the long-term strategy of the institution, to approving executive pay packages, to vetting and approving the budget. But one job that they often leave for another day: succession planning. Yet, for forward-thinking banks, having a process for succession not only can strengthen the organization in the future, but also build talent today.
Brian Moynihan, chairman and CEO of Bank of America Corp., recently spoke about this very fact. Despite not having plans to leave the institution he’s led since 2010, the 62-year-old Moynihan explained that the bank reworks its succession plan twice a year.
“We have a deep succession planning process that we go through every six months [on] the board that alternates between the senior most people and then … I do it multiple levels down so we’re always looking,” said Moynihan in an interview last December with CNBC’s Closing Bell. “The board will pick somebody. My job is to have many people prepared.”
Such a clear process makes Bank of America unique, in some regards. While surveys over the years have tried to pinpoint how many companies have formal succession plans, organizations often avoid outlining it to investors, leaving it an open question. The Securities and Exchange Commission revised disclosure rules in November 2020 to encourage companies to outline human capital resources, like diversity rates, employment practices, and compensation and benefits. Of the first 100 forms filed by companies with $1 billion in market capitalization, only 5% of the companies added any additional detail to the succession planning process, according to researchers working with Stanford University and corporate data provider Equilar. Bank Director’s 2019 Compensation Survey found 37% of bank executives and board members reporting that their bank had not designated a successor or potential successors for the CEO.
So much of a bank’s long-term success has to do with having a clear plan if the head of the business must leave. This becomes especially true if the CEO must step aside suddenly, like for a health concern or other emergency. It’s on the board to lead this search. But when done right, it can also become a powerful tool to prepare internal and external talent, a process embraced by the current CEO.
David Larcker has studied CEO succession planning as a professor at Stanford Graduate School of Business, where he leads the school’s Corporate Governance Research Initiative. “One of the two key things that boards do is hiring and firing the CEO,” says Larcker. Many boards, though, “do not put in enough time and effort in succession,” he adds.
By not taking an active approach to this part of the job, it can lead to the wrong hire, resulting in years of poor management. Larcker says one of the reasons for a lack of proper succession plans is often because it’s one of the least exciting roles a board undertakes, so it gets put to the backburner. Plus, since you rarely replace the CEO, it’s not always a priority.
Larcker and his research team sought to identify what occurs when a board lacks a succession plan. They looked at scenarios where the CEO left abruptly, either because the person resigned, retired or made other transitions. These are often the reasons disclosed to the public; in reality, the company may have fired a CEO without stating that fact. Out of the various scenarios, the researchers identified situations where the board and CEO likely parted ways due to performance.
Out of all the media citations, 67% of the time the company named a permanent successor in the announcement; in 10% of the cases, it appointed a permanent successor but after a delay; and 22% of the time it named an interim successor. Those moments of upheaval provide investors with the clearest insight into whether the board took a proactive approach to succession, since the plans aren’t often public.
When a company named an interim successor, that was one of the clearest signs that the organization fired the CEO without a plan in place, and the stock performance of the company performed the worst after the announcement. Also, it’s worth noting that 8% of the time, the company named a current board member to the CEO role. When that occurred, the company’s stock price often performed worse than when internal or external candidates were chosen.
What separates the organizations that can name a successful permanent successor from those that can’t? Often, it’s the organizations that have a clear line to the talent that’s growing inside and outside of the bank.
John Asbury knows all too well the need for this line of succession — it’s how he got the head role at Atlantic Union Bankshares, Corp., a $20 billion public bank based in Richmond, Virginia. When Asbury was tapped as CEO in 2017, he followed G. William Beale, who had helmed the bank — then known as Union Bankshares Corp. — for almost 25 years. The bank had done a full executive search starting two years before Beale stepped away. Now, despite not having any plans to retire, Asbury, 57, takes the job of building succession within the entire organization seriously.
“There are too few people in the industry who understand how the bank actually works or runs front to back,” Asbury says. “Oftentimes they have their area of specialty and not much else.”
Asbury, who sits on the board of directors as well, works with his human resources and talent evaluators to identify those within the organization who can fill executive roles. In addition to empowering them as executives, he gets them face time with the board. This provides the board with the ability to interact and know the talent that the bank has in the stable.
“We want these folks to understand how the organization works, and we want them at the table to talk about not just strategy for their business unit, but the bank strategy as well,” Asbury says.
Asbury recently showed this leadership style in a public way by announcing that President Maria Tedesco would add the role of chief operating officer, and he would hand over managing many of the day-to-day operations to Tedesco. This isn’t a succession plan put in place. Instead it’s giving Tedesco the ability to have 85% of the organization reporting to her, while she and other executives at the bank continue to report to Asbury.
Asbury thinks the move was needed to allow him the freedom to focus on growing Atlantic in other ways. But it also provides Tedesco with hands-on training in managing the organization. Despite the move, Asbury says that it doesn’t prevent him from working with the board on succession plans.
The compensation committee, which Asbury does not sit on, also runs succession planning at Atlantic Union Bank. Sometimes boards may be hesitant to discuss succession if the current CEO views the discussion as antagonistic. But Atlantic Union undergoes an emergency succession plan evaluation once a year — currently, Tedesco would step in as interim CEO if something unexpected occurred to Asbury. She even sits in on every board meeting except when the executive team is being discussed.
It’s a conversation that boards cannot be afraid to have. “If the CEO is on the board, that committee or board, has to own the process,” Larcker says.
What doesn’t work when it comes to succession planning? Having the new CEO step into the company while the outgoing CEO continues to helm the business for a few months to a year, added Larker. This design creates confusion from both the leadership and the staff on who they should listen and report to. “Ultimately, it’s a bad sign,” Larcker says.
Asbury knows that all too well. When he took the Atlantic Union role, Beale held the CEO position for three months while Asbury got acquainted with the organization. Within a few weeks, though, Beale let Asbury know that he would clear out the office and Asbury could call him if any questions arose. “Shorter is better in terms of transition,” Asbury adds.
That can only happen with a plan in place.
One of the biggest challenges facing all bank directors is the voluminous amount of information they need to read and comprehend before every board and committee meeting. More than a third of the board members responding to Bank Director’s 2021 Governance Best Practices Survey reported that not all directors review materials before board meetings — reducing the effectiveness of their boards.
Board and committee meeting packets — most of which are distributed electronically through secure board portals — can easily reach several hundred pages, particularly at large banks with complex operations. The packets are typically distributed several days in advance of board and committee meetings, often on a Thursday or a Friday, so directors have the weekend to read through them.
It is difficult to subscribe a best practice to board packets because they often reflect what board and committee members want to see. But there are certain standards that should apply. At a minimum, the board packet should provide a comprehensive overview of the bank’s performance, while highlighting any issues of concern that require the board’s attention. At the committee level, the packet should provide an overview of relevant areas that a particular committee is working on.
Packets should be well organized and include a complete agenda for each board and committee meeting, along with any supplemental information that is provided. There is a general tendency to provide more information than less, but it should be easily accessible to the directors.
It’s also important that the information be contextualized. The quality and utility of the information from a governance oversight perspective is generally more important than the sheer quantity of what’s being provided.
James A. McAlpin Jr., a partner and global leader of the banking practice group at Bryan Cave Leighton Paisner, says that board packets often include too much irrelevant information. McAlpin also sits on the board of Hyperion Bank, a $300 million asset community bank in Philadelphia. “I don’t need a listing of every new loan, because I don’t know these borrowers,” he says. “I need a listing of what the trends are. What is the net interest margin? What are the concentrations?” Concentration risk was a big problem for many banks during the financial crisis, McAlpin adds. “It didn’t happen over a period of one or two months, it happened over a period of time, and no one got it because no one was focused on that as a trip wire,” he says.
And the packets themselves shouldn’t be viewed as stone tablets that came down from Mount Sinai. Boards should periodically review whether the packets’ structure and organization, as well as the information being provided, still meets directors’ needs. “You may be comfortable with the board package, but when was the last time everybody, including your committee chairs, said, ‘Do we like the format? Do we like the information presented?’” says McAlpin. “‘What’s missing?’ Very few boards have that conversation.”
The board at Community Bank System, a $15 billion regional bank holding company headquartered in DeWitt, New York, meets 10 times a year. There is also a separate board for Community Bank, N.A., the holding company’s banking subsidiary. Holding company directors also serve on the bank board; the meetings occur back to back. Meetings of the board’s three standing committees — audit, compensation and governance — usually occur before the two board meetings. Lead Director Sally A. Steele, who joined the board in 2003 and served as chair from 2017 to 2021, says the holding company and bank boards, as well as each committee, receive their own packet with a separate agenda and supplemental information.
There’s a lot to read before meetings, according to Steele. The audit committee packet in particular can be expansive, running to as many as 300 pages. The packets for the compensation and governance committees, as well as the holding company and bank boards, are generally smaller. But taken all together, Steele says, the information “can be really voluminous.”
Should a director attempt to read every single page if the board packet runs several hundred pages? That may be impractical — and perhaps unnecessary. Steele practices something that might be described as selective reading. “It depends on which [packet] you’re talking about,” she says. Steele is not a member of the audit committee and thus does not attempt to dig through that particular pile of information, even though she and all other non-audit committee members receive it. “Do the folks on [the audit] committee read all of it? I honestly believe they do. You can tell by the questions they ask,” she says.
As the board’s lead director, and previously as its chair, Steele reads both board packets in their entirety, as well as the packets of the committees she does serve on. “I would guess most directors focus on the committees they’re on, and the material that’s there, and then probably the bank board and holding company material,” she says. “It’s a lot of information.”
Steele believes it is the responsibility of every director to come to board and committee meetings well prepared. That includes having sufficiently reviewed the information that has been sent out in advance, even if members haven’t read every word. In fact, the Community Bank System board goes through an annual assessment process that is administered by its governance committee, and preparedness is a key part of the evaluation. “In our boardroom, it would not go over very well if people were not prepared,” she says. “I think it’s part of your fiduciary obligation to be prepared for meetings. Goes without saying.”
Plowing through an expansive board packet can be a challenging exercise for new directors who don’t have enough experience to prioritize what they must read word for word over what they can more lightly review. McAlpin believes it would be helpful if one of the more experienced directors “would offer to talk to them over lunch, or meet privately and go through the packet with them to get some sense of what has happened historically and what the packet is,” he says. “I think most boards do not do a very good job of new director orientation.
When Community Bank System recruits a new director, the board tries to lighten the new member’s load by assigning the individual to only one committee. But Steele sees no way around the fact that most new directors will have a steep learning curve, and that includes plowing through the board packet and knowing how to prioritize what’s in it.
“I’ve never found that you can have too much information,” Steele says. “There comes a point in time where you understand what’s important and what’s not. Then you get to choose if you feel it’s important enough for you to spend time on. … I just think there’s a price you pay for being a new director, and it’s figuring out and understanding what’s important and what’s not important.”
Really, What Is Franchise Value?
The concept of building franchise value was core to our Bank Board Growth & Innovation Conference in April. In this session, Fred Cannon, director of research for Keefe, Bruyette & Woods, breaks down franchise value.
Banks with dedicated customer bases enjoy significant advantages over any potential competitors. So how should a bank’s CEO and board think about franchise value—both in current terms and with an eye to the future?
Highlights from this video:
- Franchise value is measurable
- The new era is about credit availability
- Deposits are generating less value
- Franchise value creates economic value
Video length: 29 minutes
About the speaker:
Fred Cannon—is director of research at Keefe, Bruyette & Woods, Inc. He joined KBW in 2003. In his dual role as director of research and chief equity strategist, Cannon guides the research efforts at KBW, which provides industry leading research on the financial sector and research coverage on more than 540 financial services firms.