The financial services industry is facing a substantial succession bubble, with an expected 50% board and senior management turnover by 2025, driven by generational and business model changes. In addition, the recent pandemic accelerated the baby boomer generation to exit more rapidly than predicted prior to the pandemic.
Most experts agree: The high demand for senior leadership talent will continue into the foreseeable future. In the face of a highly competitive talent cycle, coupled with many banks increasing in business complexity, does your institution have confidence in the current board and senior leadership composition to guide your organization through the next five years?
Over the years, the Chartwell Partners’ Financial Services Team has helped clients evaluate their board and senior leadership team against the strategic plans for the bank to help our clients make confident leadership decisions. We have successfully used a four-step process we find effective that includes:
Step 1: Intake Engage a third party or appoint a director to lead the planning. Meet with key stakeholders, such as the chair, lead director or CEO to understand the business strategic objectives, the current leadership dynamic and unique cultural elements that drive effective leadership transition plans. The ultimate goal is to align leadership decisions to the future business objectives.
Step 2: Planning Create a tailored plan to define outcomes, outlining defined action plans and a timeline. In our case, we work with the decision-making team to provide guidance on executing against the defined plan — whether it’s testing a current succession plan or executing internal leadership assessments and processes to provide leadership insight supporting board or management changes.
Step 3: Assessment Leveraging in-person executive assessments, coupled with data-driven online assessment service, the point person should meet with the select executives and provide in-depth insights into the leadership team. They can also provide perspective on the leadership team compared to outside executive options to provide the decision makers a thorough leadership analysis.
Step 4: Reporting Following assessment, the project lead should produce a report based on the desired outcomes defined by the decision team, which may include a well-defined succession plan or a guide to an internal leadership selection process. Reports should be tailored to the specific needs of the bank, so key stakeholders can be confident in the executive leadership decisions.
At the conclusion of the four steps, it is important to communicate the plans with the team and instill board confidence in the organization. In addition, it is critical to consistently evaluate the leaders against the strategic plan and ensure they are growing and developing leaders the organization can follow. Ultimately, the board owns the responsibility for the CEO and holds them accountable for the development of their team; however, it is always important the designated committee of the board be in touch with management team succession planning. Effective succession planning takes intentional focus from the board. Banks that are proactive about succession planning increase the likelihood of a successful outcome transitioning boards and management teams.
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.
At 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.
As 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.
At 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. 
As 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?