Finding Talent For The Bank’s Future



CEO succession planning should be a top priority for a bank’s board of directors, but many institutions lack a plan. J. Scott Petty of Chartwell Partners outlines how to prepare for the short and long-term transition of the CEO and addresses recruiting new board talent.

  • Developing a Succession Plan
  • Finding Diverse and Talented Directors

When is the Right Time to Get Rid of the Wrong CEO?


fired.jpgWhen Citigroup’s chairman Mike O’Neill spoke on an investor conference call about the abrupt resignation of CEO Vikram Pandit, he said that the timing made sense because strategic planning was underway.

“And so, if we are going to hold [the new CEO] accountable for our performance, he clearly needs to have a role in setting the targets,’’ O’Neill said.

Citigroup Inc. has had a bad year. Make that a bad decade. The company’s stock price fell 89 percent during Pandit’s tenure. But the bank is hardly alone. Many of the more than 7,000 banks and thrifts in the country have problems of their own, so the question of whether you have the right CEO on the job, and if not, how to get rid of him or her, is one that many banks are trying to answer.

Courage is step one. Is the board independent enough from management to actually fire the CEO?

The Wall Street Journal reported last week that the “shake-up amounts to an extraordinary flexing of boardroom muscle at Citigroup, a company that until recently had a board stocked with directors handpicked by former CEO Sanford Weill who rarely challenged management decisions.”

Chairman O’Neill, a longtime banker and stellar CEO at the Bank of Hawaii, has only been there since April. Several other directors are recent appointees who signed on after regulators urged a board purge following the financial crisis, according to the Journal.

In fact, O’Neill had an office within 100 feet of Pandit, according to The New York Times. In his new job as chairman, O’Neill quickly got to work learning in the ins and outs of Citigroup and visiting the company’s various trading floors, according to news reports.

“The chairman of the board is critical,’’ says James McAlpin, a strategic planning expert and bank attorney at Bryan Cave LLP in Atlanta. “If you have the chairman and the CEO as the same person, that further complicates this. That makes it more difficult for the evaluation [of the CEO’s performance] to take place.”

If the board doesn’t want a non-executive chairman, a lead independent director who meets separately with other independent directors is key to maintaining independence.

It’s also important that the CEO be judged on how well he or she has executed the strategic plan. Tying the CEO’s performance to strategic goals with a formal annual evaluation is something that bank boards often don’t do.

As shocking as this might sound, banks are more likely to evaluate the performance of their tellers than their CEOs.

“There are a surprising number of banks where the CEO doesn’t see a performance review,’’ McAlpin says. “Particularly in community banks, it’s the exception rather than the rule. That makes it harder for the CEO to know how he is doing. Concern builds over time and suddenly the CEO finds himself in a very confrontational meeting with the board.”

Geri Forehand, national director of strategic services with Sheshunoff Consulting + Services, says that all CEOs should receive an annual performance review.

“When you hire a CEO, you have to have a way to evaluate the CEO, both quantitatively and qualitatively,’’ he says. “Every board should handle this in a formal matter. You should give your CEO an evaluation on an annual basis.”

He says the CEO should be fully informed of the metrics that will be used to measure performance and how they will be used, including how the board will factor in qualitative measures.

“I think the CEO wants to know what is expected of him or her,’’ Forehand says.

It’s not only good for the CEO, it’s good for the bank. A CEO who knows what he or she is supposed to achieve will be better able to actually achieve it.

When it’s time to make a tough decision, however, it works best for there to be a strong chairman or lead independent director. The full board needs to be involved in the discussions and the CEO needs to know the entire board has made a decision.

The board should also go through the process of identifying the next CEO far in advance of an actual resignation, which will make the transition easier, says Forehand.

The actual firing (or forced resignation), therefore, is part of a long, strategic process.

“It’s a very difficult conversation to have with a CEO,’’ McAlpin says. “[The CEO] wants to know the entire board has deliberated on this.”  

Devising a Plan and Determining What Questions to Ask


Succession planning is an often overlooked issue for community bank boards, whose agendas are stuffed with business decisions and regulatory requirements. However, good succession planning can avoid many problems in the future, and attorney Thomas Hutton of the law firm Kilpatrick Townsend & Stockton talks about the right ways to go about it.

What do you mean by succession planning?

Succession planning has to be looked at as preparation for change in leadership, whether it’s at the CEO level or any C-suite job. It could be an announced retirement or an unplanned situation, such as a death or disability or an unexpected termination of employment. It can also relate to a temporary leave of absence, maybe for medical reasons, for example.

How many boards do you work with that don’t have a formal succession plan?

There are a lot of boards that don’t have a formal succession plan or are really not up to speed on how to properly handle succession planning. Turnover at community banks tends to be relatively low. There are a lot of long-serving CEOs and CFOs, so boards can become somewhat complacent. They can think, ‘If a previous retirement went well, that means the next one will be without any issues, as well.’ They don’t really think about how situations can change, especially unexpected situations such as regulatory orders or a death or disability.

Succession planning comes up less frequently than a lot of other matters, like determining compensation on an annual basis. It’s very important to an organization, however.  Addressing it too late or improperly may lead to a level of competition for a position that becomes unhealthy and may result in internal dissention or even unanticipated or unwanted departures. Maybe that “competition” would have been better to take place over a longer period of time.  Or, the successor may need to be approved by regulators if the bank is operating under a regulatory order. If the board already has someone in mind, the process of getting regulatory approval can go quicker if the board can make a solid case for the desired successor.  In short, it’s a process that should be discussed regularly.

Is there regulatory guidance that addresses the need for a succession plan?

Not necessarily. But regulators do consider adopting and reviewing a formal succession plan at least annually a best practice.

What is the role of the board in succession planning?

The board needs to develop a formal written policy that can evolve over time. It’s not just picking someone as a possible replacement; it includes understanding the process. By addressing it regularly, at least annually, they can avoid some of the problems that typically arise and eliminate or reduce the natural anxieties and uneasiness that comes with succession planning.

In today’s environment, it’s not just replacing someone with a qualified person; the bank might have regulatory issues that could make the requirements of the position different from a couple years ago. There should also be a process to address the situation of an identified replacement not being available or not meeting the bank’s current needs. A lot of thought should go into the succession plan. Just for starters, who will handle the succession planning process—the nominating committee, the compensation committee or a succession planning committee?

What kind of balance should there be between the CEO picking a successor versus the board?

In community banks, it’s pretty common for the CEO to have an expectation that he or she will have a big voice in identifying a successor. That’s fine. However, the board really needs to control the process and should rely on the CEO for input and not just “rubber stamp” the selection. The board needs to become familiar with the candidates over time and may invite individuals to make board presentations or appear at bank or industry functions as part of the long-term “interview” process. 

Couldn’t identifying a successor lead other executives to leave?

Yes. If there’s a large gap in background and skills to the other executives, maybe it’s not as big a deal. But if there are several executives who have an interest in and are competing for a position, it may be problematic to specifically name someone too early. If the board is doing this as a long-term process, it will gain a better sense of who should be the replacement and can better handle how to address those who are not selected. However, the board should not automatically assume the no. 2 person wants to become the no. 1 person or is qualified at the time to become the no. 1 person. The no. 2 person may have little or no interest or lack the full complement of skills, depending on the timing and nature of the situation. In that case, it is important to identify who will fill the position temporarily—the chairman, a former CEO on the board or someone else.

Preparing Your Virtual Bench


lineofmen.jpgAt Isabella Bank headquartered in Mount Pleasant, Michigan, the officers are seasoned veterans with an average of approximately 20-plus years of experience at the $1.3-billion asset institution. Replacing individuals with that kind of experience when they retire is a difficult task, a fact which was not lost on Isabella Bank CEO Richard Barz, who sees his own retirement on the horizon. 

“In about 2007, the human resources director and I met and we talked about succession planning down the road,” says Barz.  “One of the things we realized is that we have to start acting now because we were going to have about seven of our senior people retiring in a ten year period—beginning in probably 2012 or 2013.” 

Barz felt the best candidates to fulfill these positions would be found within, and fortunately, his board was in full agreement.  The challenge was that as individuals were brought up into these senior positions within the organization, they would in turn be leaving openings that needed to be filled. 

“There is a term they use out there called a virtual bench,” says Barz. “It’s continually changing.  You can replace five or six positions, but you are also opening five or six positions.  So you have to make sure the next five are ready to fill in their new roles well and so on.  All of a sudden, you’ve got to think about fifteen people transitioning.  You have to develop a virtual bench of people who are fulfilling those roles.  You can’t just do it by doing an evaluation once or twice a year,” he says. 

Barz and his team started taking a more proactive approach to succession management than in years past.  They began by going through a select number of people they thought had the possibility of becoming CEO or president, as well as the people who would likely follow up the line due to backfilling.  Then, they traced the qualities they were looking for in each of these positions, and instituted a program that would emphasize these traits during goal setting for the selected individuals. 

They quickly realized that tackling this new program alone might not be the best strategy. “The problem is that we just didn’t have the time, or really the skill, to follow through and take this to the next level like we needed,” says Barz.  “At that point, we decided we wanted to bring in a professional development firm whose sole responsibility is to assist the selected individuals in working on the specific skills they would need—basically we brought in a job coach for executive development.”

All candidates went through a two year training program to identify their strengths and develop the qualities they would need for their future positions—eight started the first year, and after seeing how successful the program was becoming, 10 started the next.  Barz says the results were amazing.  He saw the candidates’ confidence increase as well as their ability to work with others in the organization and create bonding relationships.  “The whole concept was to have them work as a team,” says Barz.

The final step was to take the individuals who were going to be in the very top positions and have them work with a professional succession management firm.  Barz enlisted the firm Heidrick & Struggles, who devised its own set of important skills and attributes from the firm’s previous experience, and then went through the top people to see how these individuals fit into these roles. The firm helped identify the strengths and opportunities for improvement of the future CEOs and presidents, which helped these individuals develop towards their eventual roles. 

While this was a long and fairly complicated process, Barz feels it was certainly worth the investment.  For one, Barz says the failure rate of CEOs who are outside hires is too high, especially when you consider what is at stake with shareholders and the future of your entire operation.  Perhaps more importantly, all of this preparation takes away uncertainty and instills confidence in the organization.  If a position opens up either through retirement or unexpected circumstance, the bank will be assured that the person filling that spot has the necessary skills and understands the culture. 

When Barz retires as CEO, he knows the 370 employee bank will be in good hands even without him. “I’ve been asked to stay on the board, and if [the future executives] ask me for some advice I can give it to them.  But in general, they probably won’t need it. The people we have filling these roles are experienced and skilled; it’s really going to be their bank and their corporation,” he says.  

Looking Beyond the CEO: How Well Does Your Board Evaluate High Potentials?


performance.jpgAs boards seek to improve oversight of key elements of their companies, many directors would agree that they need to take a far more active oversight role in overall management succession, not just in CEO succession. The question is: how?

Taking the Lead

In the past, boards typically focused narrowly on chief executive officer succession, looking for the emergency replacement and among the direct reports to the CEO.  They paid far less attention to succession in other C-level roles (CFO, CHRO) and almost none to learning more about high potentials, or good candidates, further down in the organization.  Today, however, boards—especially bank boards—are expected to exercise far more oversight of the larger succession management process.   In January 2012 already, we have seen federal bank regulators ask one of our bank clients for a better understanding of how the board was monitoring talent development and succession for several critical roles under the CEO. 

Many boards are not just reacting to federal scrutiny, but are proactively increasing their oversight while taking care not to overstep governance boundaries.  They want to ensure that the organization has adequately planned for contingencies regarding succession in particularly critical roles such as risk, finance and legal—often referred to as control leaders.  

For example, in the past eighteen months, while working with boards on leadership and succession issues, I witnessed three instances in which a Fortune 500 board strongly urged the CEO to remove a senior executive.  The case of one CFO is typical.  He had performed well in the past; he was highly talented and the company was not in trouble, but not thriving.  However, in looking at the company’s long-term strategy, the board reluctantly but firmly concluded that he did not have the right competencies to help take the company where it needed to go.  The CEO concurred and, following careful planning and communications, he departed just over 90 days later.

Where to Start

For boards eager to get on top of the issue, the place to begin is with 360-degree evaluations of executives from the C-level down through the next two layers of management.  The board should ask management to undertake a comprehensive assessment of the strengths and weaknesses of all of those executives. Whether conducted with internal resources or with external assistance, these evaluations should not simply be generic appraisals, but full assessments of each leader with multiple inputs and an in-depth assessment interview of each leader.

The executives should be evaluated against the requirements of their particular roles as well as in the context of the company’s long-term strategy and objectives.  Do they have the skills, experiences and leadership behaviors that will be required to successfully execute against the strategy over the coming years? Less proactive boards, especially at troubled banks, may find themselves conducting such evaluations anyway.  Increasingly, we have seen the Federal Reserve, the Federal Deposit Insurance Corp.  and state banking regulators request full assessments of executives (and in some cases directors) at banks with capital or loan exposure issues.

Supplement Evaluation with Exposure

Few people would deny that formal evaluation is an indispensable element in succession management at any level.  But formal evaluations of executives beyond the CEO and heirs-apparent could be greatly enhanced through more direct exposure between company leaders and the directors.

However, boards are usually exposed to only a handful of top executives—the CEO of course, and usually the chief financial officer the head of human resources and the general counsel/corporate secretary.  Contact with other executives is often limited for timing and other reasons. That’s unfortunate because directors are typically leaders whose success is based on their ability to judge top talent at first hand.  Direct contact with high potentials would enable directors to exercise their judgment, bring evaluations to life, and take the measure of these executives as individuals and as leaders. There are a number of natural opportunities for these interactions, including:  

  • Board presentations:  Have more high potentials appear before the board to present business reviews, participate in Q&As, or otherwise engage in substantial business discussions with the directors.  Boards of course have to balance these additions to their already crowded agendas with the need to keep the length of their meetings manageable. 
  • Strategy offsites:  Most companies conduct annual offsites, where leadership comes together for a couple of days to review and, if necessary, revise company strategy.  As with increased board presentations, these sessions offer opportunities for getting a grasp on the business acumen of high potentials.
  • Site visits: Board members can visit high potential leaders where they actually work—at the divisions they run or in the geographies for which they are responsible.  Tour the sites; get to know these executives and the business more in-depth.   In fact, it’s a good idea to have new directors make such site visits as part of the onboarding process.
  • Board dinners: The two to three hours of a dinner offer an ideal opportunity for directors to get a feel for high potentials as individuals and for those intangible characteristics that are so important for leadership.  It’s a simple matter of seating and subject matter: intersperse the executives and directors at the table and forgo the discussions of golf in favor of topics that get at who these executives really are.
  • Special events: When there are special events relevant to directors, such as an occasion of honoring one of them, invite high potentials to participate.  Such occasions can provide directors with informal opportunities to glimpse another aspect of an executive that they had not previously appreciated.  

All of these interactions are win-win.  Directors gain an understanding of what is really taking place deep in the company’s talent pool, greater knowledge of the business and a multi-dimensional basis on which to judge talent and offer advice on managing it.  High potential executives develop earlier in their careers the ability to work with the board.

Ask Yourself How Well You Really Know These Executives

It is of course unlikely that your board does none of the things being suggested here.  The real question, however, is not how many of the boxes you may have checked. It is whether you are doing these things in a systematic, comprehensive way that yields substantive, multi-dimensional, and actionable knowledge of the company’s cadre of high potential leaders.  

For example, consider the substance and multi-dimensionality of your knowledge with regard to key executives and risk management.  Do you know the capabilities in risk management of each of those executives?  Do you have some idea of each individual’s appetite for risk and how it fits with the bank’s strategy? 

To gauge quality of your current ability to evaluate high potential executives, ask yourself these simple yes-or-no questions: 

  • Is the board regularly provided with a summary of 360-degree evaluations of all direct reports of the CEO and selected high potential/ successors below that tier?
  • Are the evaluations based on company’s forward looking strategic needs as well based on regular job and role requirements?
  • Do you know who is in the pipeline not just as possible CEO successors, but also for other critical C-level roles—particularly those roles deemed critical by regulators?
  • Do you feel you have enough information to evaluate those executives in terms of both their business and technical capabilities and their leadership ability?
  • Do your current interactions with high potential executives fail to address any of the four or five chief criteria by which you think executive potential should be judged?

If you answered “no” to any of those questions, then it may be time for your board to adopt practices that provide more satisfying answers and better oversight. 

Succession Planning Without Three Envelopes


three-envelopes.pngAccording to a recent WorldatWork survey of large companies, over 30% have no succession plans in place and 50% of executives say they do not have a successor for their current role.  Why?  They cited a number of reasons:

  • Not enough opportunities for employees to learn beyond their own roles (39%)
  •  Process isn’t formalized (38%)
  • Not enough investment in training and development (33%)
  • Not actively involving employees or seeking their input (31%)
  • It only focuses on top executives (29%).

A lack of succession planning can lead to a lack of strategic direction and weakened financial performance, but it is hard work and Boards tend to make it a task instead of a strategy. 

Or, you could use the three envelope approach.  I learned this approach from a fellow who had just been hired as the new CEO of a large, publicly held company.  The CEO who was stepping down met with him privately and presented him with three numbered envelopes. “Open these if you run up against a problem you don’t think you can solve,” he said.

Well, things went along pretty smoothly, but six months later, the net interest margin took a downturn and he was really catching a lot of heat. About at his wits’ end, he remembered the envelopes.  He went to his drawer and took out the first envelope.  The message read, “Blame your predecessor.”  The new CEO called a press conference and tactfully laid the blame at the feet of the previous CEO.  Satisfied with his comments, the press – and Wall Street – responded positively, the stock price began to pick up and the problem was soon behind him.

About a year later, the company was again experiencing a slight dip in margins, combined with serious balance sheet problems. Having learned from his previous experience, the CEO quickly opened the second envelope.  The message read, “Reorganize.”  This he did, and the stock price quickly rebounded.

After several consecutive profitable quarters, the company once again fell on difficult times.  The CEO went to his office, closed the door and opened the third envelope.  The message said, “Prepare three envelopes……….”

You don’t need three envelopes if you use succession planning as a strategy.

Are You Ready to Replace Your CEO?


Heidrick-WhitePaper.pngA board’s greatest obligation is arguably to assure leadership continuity at the institution it serves. The passage of the Sarbanes-Oxley Act in 2002 brought this function more to the front and center of director responsibilities. Recent events in the financial services industry have served to bring an even brighter spotlight to the challenges associated with managing leadership transitions. 

The increasing emphasis placed on this board responsibility has for the most part not been accompanied by a sufficient evolution in terms of our understanding of best practices in succession.  Key to the evolving succession planning process is to make the distinction between the event of a succession—and the steps needed to make it work—and the process of succession planning, an ongoing set of activities that boards must have the discipline to continually pursue.  

No one denies the fact that leadership continuity is critical to the success of any financial institution. When a succession event is poorly managed, there can be immediate negative effects on a firm’s performance, a loss of strategic momentum, and a stain on its reputation. 

In financial services, recent events make the identification of a strong successor both more important and more difficult.  To the first point, many see a leadership crisis based on decisions made in the past.  To the second point, many once well-respected executives are now less so—deservedly or not.  Have some of these executives demonstrated that they are poor decision makers without a moral compass, or have they had the most incredible learning experience from which to further their careers?   Boards will be struggling with questions like this one for some time to come.

So there are challenges to the board stemming from dramatic industry failures over the past few years—but there are also challenges that come from what the industry is likely to face in the coming years.  Waning consumer confidence, increasing government regulation, and consolidation are just a few of the very consequential forces leaders will confront.  So it is easy to see that there is every reason for boards of directors to work to get succession planning right.  Since there is plenty of evidence showing that “getting it right” is not intuitive, here are some recommendations from our research and experience that your board can put into practice right away.

Plan ahead, even when you don’t think there’s a need

Since CEO succession is a rare event, boards have little chance to practice to make the process perfect.  It also means it is difficult for board members to develop experience with the task.  This is a gap your board needs to fill—they should seek members as experienced with succession as they do members able to lead committees like audit, risk and compensation.

That said, your board must recognize that a healthy succession process begins long before the CEO plans to step down and it ends long after the new CEO has taken the reins.  Even if your current CEO has plenty of remaining “runway” in his or her career, the board cannot rest sanguine.  In the early spring of 2010, the BP board was likely not spending much time thinking about a successor to the company’s young and popular CEO, Tony Hayward.  The Deepwater Horizon oil spill—and Hayward’s flippant response—quickly changed the board’s priorities.  It’s simple—view succession as a process, not an event!  Building leaders is complex.  An event-based succession approach is naïve in its underestimation of the complexity of preparing leaders. 

Seeing succession as a continuous process has the added benefit of forcing your board to be focused on the future.  Too often, directors are looking in the rearview mirror to understand what the company needs for the road ahead.  A good experience with the departing CEO leads directors to want “another one of those.”  A bad experience leads directors to favor candidates who offer a stark contrast in some key way to the exiting executive. Though there are lessons to be learned from studying the past, it is clear that the real test of a candidate’s viability is the degree to which they are prepared to lead the company over the challenges ahead—not the degree to which they provide the desired contrast to the departing CEO.

It’s not just about compliance

Since the enactment of the Sarbanes-Oxley Act, many boards have adopted what we call a compliance-based approach to succession. A compliance approach allows directors to quickly point to an organizational chart with names in boxes.  In other words, there is a plan of some sort so that everyone can say with a straight face that there is a plan. Unfortunately, our private conversations with directors too often reveal a lack of consensus about the quality of the “name in the envelope.”  Further, it is too easy for the existence of a plan like this to allow complacency to set it.  Leadership needs are a moving target—if the plans that provide compliance are not continually revisited, then they are simply not operational.

The board must own the planning, not the CEO

Another common mistake we see occurs when boards delegate too much of the task of succession planning to the incumbent CEO.  As good a leader as the CEO might be, it isn’t clear they are best positioned to choose their successor.  First of all, very few CEOs have any experience evaluating and choosing a CEO.  They are probably biased by their own style and experiences.  They may prefer a successor who will solidify their legacy when it comes to the direction of the company, while instead they need to dispassionately evaluate what the company needs going forward.  Regardless of the CEO’s capabilities in identifying successors, the board of directors simply needs to own the process.  Succession planning is no more properly delegated than any of the other board responsibilities.  Of course CEOs play a role—but they must not be the owner of the effort.

Use strategic planning to look for new CEO

Each of these threats to effective succession planning is avoidable, as long as directors are able to recognize them as bad habits that do not serve the company.  If a board fails to do so, the odds increase that they will be caught by the surprise departure of a CEO.  Should that happen, it is a best practice to always be in a position to name a consensus emergency interim CEO—the Cathie Lesjak to HP’s Mark Hurd.  More generally, the board needs to regularly delve in to the company’s strategic plan to develop and then continually revise the skills and experience profile for the next CEO. This allows the board to regularly assess the internal candidates against the forward-looking needs of the company, to identify the gaps, and to take the steps required to address them.  Coincidentally, this effort also gives the board a framework to repeatedly assess the incumbent CEO and provide real feedback..  Such an effort is also valuable as the board assesses external hires.

The drawbacks of the horse race

One common strategy to succession is to create a horse race for the position— much like Jack Welch did in anticipation of his departure from GE.  Of course, a horse races creates a winner, but with many losers.   Boards have to think carefully about how publically they develop internal candidates—executives who lose the horse race likely leave.  Boards may prefer not to make  investments in developing their competitions’ next generation of leadership.

Finally, directors need to always keep context in mind—no two events are the same.  For example, when the other members of the leadership team are skilled, motivated, and synchronized, the board can take a bit more risk on a less experienced successor.  An additional contextual consideration concerns the role to be played by the outgoing CEO.  Sometimes the exiting CEO has a key role to play—perhaps as chairman—in the onboarding and support of the new leader.  Or perhaps, simply freeing the new leader of the chairman title for a time will allow a smoother transition into his or her  leadership position.  In other cases, the CEO may not have the ability to do that—or it may, in fact, not be necessary.   

Important questions for the board

As we noted at the outset, the first key to improving succession practice is to understand there are really two elements that require attention.  First, a continuous process needs to be in place that involves understanding the future needs of the firm, the degree to which current talent is prepared to lead in that envisioned future and ways to address any deficiencies.  Second, the succession event itself requires careful management—the way a board designs and executes the event will impact the new leader, the rest of top management, and the future of the firm.  To get ready for these responsibilities, make sure your board is spending sufficient time debating questions like these:

  • Based on our understanding of future business needs, do we understand what the next CEO looks like?
  • How do we begin to develop our internal candidates with potential?
  • How can we become more proactive in understanding the potential talent outside of our company?
  • What do we as board members need to do in order to prepare the successor—and the top management team— for success?
  • What specific steps can we identify and implement to make our succession a true, informed and ongoing process?