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.

How to Craft a Succession Planning Process

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.

Evaluating Your CEO’s Performance

If a core responsibility of a bank board of directors is to hire a competent CEO to run the organization, shouldn’t it also review that individual’s performance?

In Bank Director’s 2021 Governance Best Practices Survey, 79% of responding board members said their CEOs’ performance was reviewed annually. However, 15% said their CEOs were not reviewed regularly, and 7% said the performance of their CEOs had been assessed in the past but not every year.

The practice is even less prevalent at banks with $500 million in assets or less, where just 56% of the survey respondents said their CEOs were reviewed annually. Twenty-eight percent said they have not performed a CEO performance evaluation on a regular basis, while 16% said their boards have evaluated their CEO in the past but not every year.

Gary R. Bronstein, a partner at the law firm Kilpatrick Townsend, regularly counsels bank boards on a variety of issues including corporate governance. “It doesn’t surprise me, but it’s a problem because it should be 100%,” he says of the survey results. “One of the most important responsibilities of a board is having a qualified CEO. In fact, there may not be anything more important, but it’s certainly near the top of the list. So, without any type of evaluation of the CEO, how do you gauge how your CEO is doing?”

A CEO’s effectiveness can also change over time, and an annual performance evaluation is a tool that boards can use to make sure their CEO is keeping pace with the growth of the organization. “There are right leaders for right times, [and] there are right leaders for certain sizes,” says Alan Kaplan, CEO of the executive search and board advisory firm Kaplan Partners. “There are situations that sometimes call for a need to change a leader. So, how is the board to know if it has the right leader if it doesn’t do any kind of formal evaluation of that leader?”

One obvious gauge of a CEO’s effectiveness is the bank’s financial performance, and it’s a common practice for boards to provide their CEOs with an incentive compensation agreement that includes such common metrics as return on assets, return on equity and the growth of the bank’s earnings per share, tangible book value and balance sheet.

Bank Director’s 2021 Compensation Survey contains data on the metrics and information used by bank boards to examine CEO performance.

But just because a CEO hits all the targets in their incentive plan, and the board is satisfied with the bank’s financial performance, doesn’t mean that no further evaluation is necessary. Delivering a satisfactory outcome for the bank’s shareholders may be the CEO’s primary responsibility, but it’s certainly not the only one.

A comprehensive CEO evaluation should include qualitative as well as quantitative measurements. “There are a lot of different hats that a CEO wears,” says Bronstein. “It probably starts with strategy. Has the CEO developed a clear vision for the bank that has been communicated both internally and externally? Other qualitative factors that Bronstein identifies include leadership — “Is the CEO leading the team, or is the CEO more passive and being led by others?” — as well as their relationship with important outside constituencies like the institution’s regulators, and investors and analysts if the bank is publicly held.

Additional qualitative elements in a comprehensive CEO assessment, according to Kaplan, could include such things as “development of a new team, hiring new people, opening up a new office [or starting] a new line of business.” An especially high priority, according to Kaplan, is management succession. If the current CEO is nearing retirement, is there a succession process in place? Does the CEO support and actively participate in that? If this is a priority for the board, then including it in the CEO’s evaluation can emphasize its importance. “Grappling with succession in the C-suite and [for] the CEO when you have a group of senior people who are largely toward the end of their career should be a real high priority,” Kaplan says.

Ideally, a CEO evaluation should involve the entire board but be actively managed by a small group of directors. The process is often overseen by the board’s compensation committee since the outcome of the assessment will be a critical factor in determining the CEO’s compensation, although the board’s governance committee could also be assigned that task. Other expected participants include the board’s independent chair or, if the CEO is also chair, the lead director.

“I think it should be a tight group to share that feedback [with the CEO], but all the directors should provide input,” says Kaplan. Once that has been summarized, the chair of the compensation or governance committee, along with the board chair or lead director, would typically share the feedback with the CEO. “I think the board should be aware of what that feedback is, and it should be discussed in executive session by the full board without the CEO present,” Kaplan says. “But the delivery of that feedback should go to a small group, because no one wants a 10-on-one or 12-on-one feedback conversation.”

Another valuable element in a comprehensive assessment process is a CEO self-assessment. “I think it’s a good idea for the CEO to do a self-evaluation before the evaluation is done by a committee or the board,” says Bronstein. “I think that can provide very valuable input. If there is a discrepancy between what the board determines and what the self-evaluation determines, there ought to be a discussion about that.”

CEO self-assessments are probably done more frequently at larger banks, and a good example is Huntington Bancshares, a $174 billion regional bank headquartered in Columbus, Ohio. In a white paper that explored the results of Bank Director’s 2021 Governance Best Practices Survey in depth, David L. Porteous — the Huntington board’s lead director — described how Chairman and CEO Stephen Steinour prepares a self-evaluation for the board that examines how he performed against the bank’s strategic objectives for the year. “It’s one of the most detailed self-assessments I’ve ever seen, pages long, where he goes through and evaluates his goals, he evaluates the bank and how we did,” Porteous said.

Porteous also solicits feedback on Steinour’s performance from each board member, followed by an executive session of the board’s independent directors to consolidate its feedback. This is then shared with Steinour by Porteous and the chair of the board’s compensation committee.

Bronstein allows that not every CEO is willing to perform such a detailed self-assessment. “If the CEO is confident about his or her position with the board and with the company, they should feel comfortable to be open about themselves,” he says.

Managing a Successful CEO Succession Process

When David Findlay was appointed president and chief executive officer at Lakeland Financial Corp. in 2014 to replace Michael Kubacki, it was the culmination of a long succession process that began in 2000 when he joined the Warsaw, Indiana-based bank as its chief financial officer. Kubacki knew Findlay, having worked with him previously at the Northern Trust Co. in Chicago, and he recruited him to Lakeland.

The bank needed a CFO, but Kubacki had something else in mind as well.

“He was a high-powered person and not only were we going to get a good CFO, we were going to get a succession plan over the long term,” says Kubacki, who remains chairman. “The strengths that he brought from a leadership potential standpoint — it was anticipated that he would eventually become the CEO. That [plan] was hatched right from the get-go.”

Findlay was promoted to president in 2010, and later began spending extra one-on-one time with individual board members in more informal settings so they could get to know him better personally. Kubacki was 63 when the board decided that Findlay was ready to become CEO; he became executive chairman for two years before eventually becoming the board’s independent chair.

Kubacki will leave the Lakeland board in 2023 when he reaches the mandatory retirement age for directors of 72. As for Findlay, he turned out to be a pretty good choice as CEO. With assets of $6 billion, Lakeland was the fifth-ranked bank on Bank Director’s 2020 Bank Performance Scorecard, a ranking of the 300 largest publicly traded U.S. banks.

CEO succession doesn’t always go as smoothly as it did at Lakeland, where a promising young executive was given time to grow into the job. If a bank doesn’t have an internal candidate to succeed a soon-to-retire CEO, then it will have to recruit one from the outside. Whichever way it goes, there is no question that managing an orderly succession process is a core responsibility of the board.

“CEO succession absolutely, unequivocally, is the No. 1 responsibility of the board of directors,” says Alan Kaplan, CEO and founder of Kaplan Partners, an executive search firm in Wynnewood, Pennsylvania. “Public company, private bank or mutual – doesn’t matter. CEO succession is a process that needs to be owned by the board and specifically, by the independent directors.”

One of the most critical elements in any CEO succession process is time. Ideally, planning for a transfer of power at the most critical position in the company should begin years in advance. Say a bank CEO reaches the age of 64 and announces to his or her board that they want to retire in a year. If succession planning hasn’t begun, it forces the board to accelerate a process that ideally should proceed at a thoughtful and deliberate pace.

“Most institutions are pretty poor at executing successful CEO succession plans,” says J. Scott Petty, a partner in the Dallas office of the executive search firm Chartwell Partners. Sometimes the problem begins with a CEO who won’t commit to a firm retirement date, which can delay the process. “The better plan would be to have an age when the CEO will agree to step down, and then be very intentional three to five years before and identify that next generation person and give them the rotational responsibilities to prepare them to be able to step into that role,” Petty says.

Most boards have a strong preference for internal candidates, because bringing in a new CEO from the outside can be extremely disruptive to a bank’s culture. But while an internal successor might be the most comfortable choice, they may lack the skills or experience necessary to help the bank grow. So, another important element in every CEO succession plan is picking someone who not only will be good for today but can help the bank achieve its strategic objectives over the next five to 10 years. “I think there’s always a preference to continue the culture of the bank by selecting someone from the inside,” Petty says. “But often times the person they thought would be right to take the bank to the next level, they realize they’re not and there’s a gap there.”

Both Kaplan and Petty say it’s often useful for boards to bring in an outside search firm to perform an assessment of their internal candidates, focusing not only on their readiness to become CEO but also on whether they are the best person to execute the bank’s long range strategic plan. “A lot of times, boards don’t have context on executives,” Kaplan says. “They may know them in the community, they may socialize with them, they may see them in the boardroom. But they don’t actually know what they’re like to work for and work with.”

Kaplan says that “a painless, bloodless, smooth transition of power internally is always preferable, providing that person is really qualified and ready based on where the company is going. Organizations that can plan ahead and develop people that seem to have leadership competencies … I think that is an ideal way to go.” Kaplan says his firm’s “three-year stick rate” for CEO and C-suite executives recruited from the outside is 97%. Still, “companies with long-term, well-groomed internal contenders on average outperform parachuting somebody in from the outside.”

Kaplan believes strongly that the CEO succession process should be guided by the board’s independent directors. The incumbent CEO can play an important role but should not be the kingmaker. “You would always want them to be a participant in the succession process because they’re your most experienced banker,” Kaplan says. “What I think is to be avoided whenever possible is that the [CEO] is driving the process.”

Ultimately, the choice of a new CEO should be a board decision.

There are many ways that bank boards can organize themselves to manage a CEO succession process. “In some cases, the nominating and governance committee acts as the succession committee,” Kaplan says. “In some cases, it’s the compensation committee because HR matters fall there. In some cases, we see boards form a special committee. Oftentimes, that committee is comprised of what I would call your most capable board members or your board members who really understand these kinds of issues.”

Every CEO search is a little different, reflecting the culture and practices of the board as well as the personalities of the people involved. The succession process at Lakeland worked as well as it did because Kubacki and Findlay had a personal relationship, and the younger executive was willing to be patient. “I think we were very fortunate we had David — that we had him so long and it was just very seamless,” Kubacki says. “Can every organization say they’re going to recruit a person and that person is going to wait 14 years to be CEO? It worked for us, but David is a special guy.”

A Guide to Getting CEO Transitions Right in 2020 and Beyond

Banks need to get CEO transitions right to provide continuity in leadership and successful execution of key priorities.

As the world evolves, so do the factors that banks must consider when turnover occurs in the CEO role. Here are some key items we’ve come across that bank boards should consider in the event of a CEO transition today.

Identifying a Successor

Banks should prepare for CEO transitions well in advance through ongoing succession planning. Capable successors can come from within or outside of the organization. Whether looking for a new CEO internally or externally, banks need to identify leaders that have the skills to lead the bank now and into the future.

Diversity in leadership:
Considering a diverse slate of candidates is crucial, so that the bank can benefit from different perspectives that come with diversity. This may be challenging in the banking industry, given the current composition of executive teams. The U.S. House Committee on Financial Services published a diversity and inclusion report in 2020 that found that executive teams at large U.S. banks are mostly white and male. CAP found that women only represent 30% of the executive team, on average, at 18 large U.S. banks.

Building a diverse talent pipeline takes time; however, it is critical to effective long-term succession planning. Citigroup recently announced that Jane Fraser, who currently serves as the head of Citi’s consumer bank, would serve as its next CEO, making her the first female CEO of a top 10 U.S. bank. As banks focus more on diversity and inclusion initiatives, we expect this to be a key tenet of succession plans.

Digital expertise:
The banking industry continues to evolve to focus more on digital channels and technology. The Covid-19 pandemic has placed greater emphasis on remote services, which furthered this evolution. As technology becomes more deeply integrated in the banking industry, banks will need to evaluate their strategies and determine how they fit into this new landscape. With increased focus on technology, banks must also keep up with leading cybersecurity practices to provide consumers with the best protection. Succession plans will need to prioritize the skills and foresight required to lead the organization through this digital transformation.

Environmental, Social and Governance (ESG) strategy:
Investors are increasingly focused on the ESG priorities and the potential impact on long-term value creation at banks. One area of focus is human capital management, and the ability to attract and retain the key talent that will help banks be leaders in their markets. CEO succession should consider candidates’ views on these evolving priorities.

Paying the Incoming and Outgoing CEOs

Incoming CEO:
The incoming CEO’s pay is driven by level of experience, whether the CEO was an internal or external hire, the former CEO’s compensation, market compensation and the bank’s compensation philosophy. In many cases, it is more expensive to hire a CEO externally. Companies often pay external hires at or above the market median, and may have to negotiate sign-on awards to recruit them. Companies generally pay internally promoted CEOs below market at first and move them to market median over two or three years based on their performance.

Outgoing CEO:
In some situations, the outgoing CEO may stay on as executive chair or senior advisor to help provide continuity during the transition. In this scenario, pay practices vary based on the expected length of time that the chair or senior advisor role will exist. It’s often lower than the amount the individual received as CEO, but likely includes salary and annual bonus opportunity and, in some cases, may include long-term incentives.

Retaining Key Executives

CEO transitions may have ripple effects throughout the bank’s executive team. Executives who were passed over for the top job may pose a retention risk. These executives may have deep institutional knowledge that will help the new CEO and are critical to the future success of the company. Boards may recognize these executives by expanding their roles or granting retention awards. These approaches can enhance engagement, mitigate retention risk and promote a smooth leadership transition.

As competition remains strong in the banking industry, it is more important than ever to have a seamless CEO transition. Unsuccessful CEO transitions are a distraction from a bank’s strategic objectives and harm performance. Boards will be better positioned if they have a strong succession plan to help them identify CEO candidates with the skills needed to grow and transform the bank, and if they effectively use compensation programs to attract and retain these candidates and the teams that support them.

Coronavirus Tests Banks’ Emergency Succession Planning

When it comes to emergency succession planning, banks prepare for the worst and hope for the best.

The coronavirus crisis has reminded us of the importance of emergency succession planning at banks, as well as related disclosure considerations. Boards must create emergency succession plans in the event a key executive become incapacitated. Some institutions may need to activate these plans during the pandemic and may wish they had spent more time detailing them in calmer, more predictable times.

“When you think of disasters, a lot of people think of natural disasters and don’t really think about pandemics. That’s where that succession planning comes in: Not that we wouldn’t have this for a natural disaster, but the chances of somebody dying is pretty small,” says Laura Hay, a managing director at executive compensation firm Pearl Meyer. “Here, there’s a much higher likelihood of, at least temporarily, needing some additional support.”

The coronavirus pandemic may last for months, if not over a year, in the United States. There were about 800,000 confirmed cases and about 40,000 deaths as of April 22, according to economic data firm YCharts; 4.16 million tests have been administered. Some groups are at higher risk for a severe illness from Covid-19 than others, according to the Center for Disease Control and Prevention, including adults over than 65 and individuals who have underlying medical conditions.

Executives and directors at many banks are particularly vulnerable, based off this. Seventy-two percent of CEOs at institutions participating in Bank Director’s 2019 Compensation Survey were 55 or older; 2% were older than 74. Board members were in the same demographic, with a median director age of 64.

At least one financial firm has disclosed a death of an executive due to Covid-19: Jefferies Group CFO Peg Broadbent died of complications related to the coronavirus in late March, according to Jefferies Financial Group.

Spirit of Texas Bancshares Chairman and CEO Dean Bass took medical leave after contracting the coronavirus, according to an April 7 regulatory filing from the Conroe, Texas-based bank. The board appointed Chief Lending Officer David McGuire to serve as interim CEO and director Steven Morris to serve as acting chairman in his absence. Bass resumed his duties at the $2.4 billion bank on April 13, according to a subsequent filing.

Emergency succession plans differ from long-term succession plans in key ways, Hay says. It is prudent for boards to inform the individual who will be appointed interim or successor in an emergency to prepare them for the role, while directors may want to keep their thoughts on long-term succession plans under wraps. More than one-third of respondents to Bank Director’s 2019 Compensation Survey had not designated or identified successors for the CEO.

“People need to get more detail in their plans, and they should not just focus on the CEO,” Hay says. “You need to identify and communicate who that person is, and probably allow them to talk about how a succession would work, with a certain level of detail.

In times like these, banks may want to extend contingency planning to the board as well. This will not be a theoretical exercise for some companies, Hay says; a director at one of her clients recently died from Covid-19. Other directors may be available to step in, though banks should have conversations about appointing an acting committee head who could fill the potential vacancy.

Another major consideration for banks during the pandemic will be the decision to disclose a diagnosis or illness of an executive. Securities rules gives “substantial discretion” to boards weighing the material nature of such disclosures, according to a January article by Fenwick & West attorneys. A disclosure is only necessary when there is “‘a present duty to disclose’ and the information is considered ‘material,’” they wrote.

The wide range of Covid-19 symptoms and outcomes means the disclosures will probably be on a “case by case” basis, factoring in the materiality of the individual or affected operations, says John Spidi, a partner in the corporate practice group at Jones Walker.

“In those cases where it is not completely clear disclosure is required under SEC regulations, it’s probably a good idea to make the disclosure if the individual involved has a material impact on the company or its results of operations,” he says.

Boards may even opt to not disclose if the executive can continue performing their key duties, which seems to be what Morgan Stanley did after Chairman and CEO James Gorman tested positive for Covid-19 in mid-March. Gorman led regular calls with the bank’s operating committee and board of directors in self-isolation. He shared the news in early April via a video message to employees, saying that he did not experience severe symptoms and has fully recovered, Reuters reported.

Hopefully very few banks will need to activate their emergency succession plans, but Hay says creating detailed strategies protects shareholders and keeps operations stable during an otherwise chaotic time.

“If you don’t have a plan, or your plan is super high level where you have to think about how you’re actually going to deploy it, you’re behind the eight ball,” she says.

Conversing with Chief Cultural Officers

Bankers talk about the importance of culture all the time, and a few have created a specific executive-level position to oversee it.

Chief culture officer is an unusual title, even in an industry that promotes culture as essential to performance and customer service. The title was included in a 2016 Bank Director piece by Susan O’Donnell, a partner with Meridian Compensation Partners, as an emerging new title, citing the fact that personnel remain a critical asset for banks.

“As more millennials enter the workforce, traditional banking environments may need to change,” she wrote. “Talent development, succession planning and even culture will be differentiators and expand the traditional role of human resources.”

Yet a recent unscientific internet search of banks with chief culture officers yielded less than a dozen executives who carry the title, concentrated mostly at community banks.

One bank with a chief culture officer is Adams Community Bank, which has $618 million in assets and is based in Adams, Massachusetts. Head of Retail Amy Giroux was awarded the title because of her work in shifting the retail branches and staff from transaction-based to relationship-oriented banking, which began in 2005. Before the shift, each branch tended to operate as its own bank, with the manager overseeing the workplace environment and culture. That contributed to stagnation in financial performance and growth.

“We decided that we wanted to grow but to do that, we really needed to invest in our workplace culture,” she says. “When you think of a bank’s assets and liabilities, which represents net worth and capital, cultural capital becomes equally important.”

The bank’s reinvention was led by senior leadership and leveraged a training program from transformation consultancy The Emmerich Group to retrain and reorient employees. The program incorporated Adams’ vision and core values, as well as accountability through measurable metrics. Branch staff moved away from acting as “order-takers” for customers and are now trained to build and foster relationships.

“It’s worked for us,” says CEO Charles O’Brien. “We’re the go-to community bank for our customers, and they rave about how different we are. We’ve grown significantly over the last five years.”

As CCO, Giroux works closely with the bank’s human relations team on fulfilling the bank’s strategic initiatives, aligning operations with its vision and goals, creating a framework of visibility and deliverability for goals and holding employees accountable for performance. She reports to O’Brien, but says her efforts are supported by the whole executive team.

“A lot of times, people think that culture is invisible. They’ll sometimes say, ‘Well, how do I do these things on top of my job?’” she says. “Culture isn’t something you’re doing on top of your job. It’s how you do your job.”

At Fargo, North Dakota-based Bell Bank, the chief culture position is held by Julie Peterson Klein and is nestled within the human resources group, where about 20 employees are split between HR and culture. She says she has a “people first, workload second” orientation and has focused on culture within HR throughout her career; like Giroux, the title came as recognition for work she was already doing.

She says her job is really about empowering employees at the State Bankshares’ unit to see themselves as chief culture officers. Bell’s culture team supports employees by engaging the $5.7 billion bank’s 200 leaders in engagement and training, and works with HR to handle onboarding, transfers, promotion and exits. The group also leads events celebrating employees or giving back to the community, using storytelling as a way to keep the bank’s culture in front of employees.

“We focus on creating culture first, and we hire for that on the HR side,” she says.

Culture is important for any organization, but Giroux sees special significance for banks because of the large role they play in customers’ financial wellness. Focusing on culture has helped demonstrate Adams’ commitment of giving customers “extraordinary service.”

“Prior to having the collaboration and the infrastructure for culture, everybody kind of did their own thing,” Giroux says. “This really solidifies the vision and the mission. And it really is, I believe, the glue that holds us together.”

Using Succession Planning to Unlock Compensation Challenges

compensation-9-16-19.pngSuccession planning could be the key solution boards can use to address their biggest compensation challenges.

Succession planning is one of the most critical tasks for a bank’s board of directors, right up there with attracting talented executives and compensating them. But many boards miss the opportunity of allowing succession planning to drive talent retention and compensation. Banks can address two major challenges with one well-crafted plan.

Ideally, succession planning is an ongoing discussion between executive management and board members. Proper planning encourages banks to assess their current talent base for various positions and identify opportunities or shortfalls.

It’s not a static one-and-done project either. Directors should be aware of the problems that succession planning attempts to solve: preparing future leaders, filling any talent voids, attracting and retaining key talent, strategically disbursing training funds and ultimately, improving shareholder value.

About a third of respondents in the Bank Director’s 2019 Compensation Survey reported that “succession planning for the CEO and/or executives” was one of the biggest challenges facing their banks. More popular challenges included “tying compensation to performance,” “managing compensation and benefit costs,” and “recruiting commercial lenders.”

But in our experience, these priorities are out of order. Developing a strategic succession planning process can actually drive solutions to the other three compensation challenges.

There are several approaches boards can use to formulate a successful succession plan. But they should start by assessing the critical roles in the bank, the projected departure dates of those individuals, and information and guidance about the skills needed for each position.

Boards should be mindful that the current leaders’ skill sets may be less relevant or evolve in the future. Susan Rogers, organizational change expert and president of People Pinnacle, said succession planning should consider what skills the role may require in the future, based on a company’s strategic direction and trends in the industry and market.

The skills and experiences that got you where you are today likely won’t get you where you need to go in the future. We need to prepare future leaders for what’s ahead rather than what’s behind,” she said.

Once a board has identified potential successors, it can now design compensation plans that align their roles and training plans with incentives to remain with the organization. Nonqualified benefit plans, such as deferred compensation programs, can be effective tools for attracting and retaining key bank performers.

According to the American Bankers Association 2018 Compensation and Benefits Survey, 64% of respondents offered a nonqualified deferred compensation plan for top management. Their design flexibility means they can focus on both longer-term deferrals to provide retirement income or shorter-term deferrals for interim financial needs.

Plans with provisions that link benefits to the long-term success of the bank can help increase performance and shareholder value. Bank contributions can be at the board’s discretion or follow defined performance goals, and can either be a specific dollar amount or a percentage of an executive’s salary. Succession and training goals can also be incorporated into the plan’s award parameters.

Such plans can be very attractive to key employees, particularly the young and high performing. For example, assume that the bank contributes 8% of a $125,000 salary for a 37-year-old employee annually until age 65. At age 65, the participant could have an account balance equal to $1,470,000 (assuming a crediting rate equal to the bank’s return on assets (8%), with an annual payment of $130,000 per year for 15 years).

This same participant could also use a portion of the benefit to pay for college expenses for two children, paid for with in-service distributions from the nonqualified plan. Assume there are two children, ages three and seven, and the employee wants $25,000 a year to be distributed for each child for four years. These annual $25,000 distributions would be paid out when the employee was between ages 49 and 56. The remaining portion would be available for retirement and provide an annual benefit of $83,000 for 15 years, beginning at age 65.

Boards could use a plan like this in lieu of stock plans that have similar time horizons. This type of arrangement can be more enticing to younger leaders looking at shorter, more mid-term financial needs than a long-term incentive plan.

And many banks already have defined benefit-type supplemental retirement plans to recruit, retain, and reward key executives. These plans are very popular with executives who are 45 and older, because they provide specific monthly distributions at retirement age.

It is important that boards craft meaningful compensation plans that reward older and younger executives, especially when they are vital to the bank’s overall succession planning efforts and future success.

Community Bank Succession Planning in Seven Steps


succession-6-25-19.pngSuccession planning is vital to a bank’s independence and continued success, but too many banks lack a realistic plan, or one at all.

Banks without a succession plan place themselves in a precarious, uncertain position. Succession plans give banks a chance to assess what skills and competencies future executives will need as banking evolves, and cultivate and identify those individuals. But many banks and their boards struggle to prepare for this pivotal moment in their growth. Succession planning for the CEO or executives was in the top three compensation challenges for respondents to Bank Director’s 2018 Compensation Survey.

The lack of planning comes even as regulators increasing treat this as an expectation. This all-important role is owned by a bank’s board, who must create, execute and update the plan. But directors may struggle with how to start a conversation with senior management, while executives may be preoccupied with running the daily operations of the bank and forget to think for the future of the bank without them. Without strong board direction and annual check-ins, miscommunications about expected retirement can occur.

Chartwell has broken down the process into seven steps that can help your bank’s board craft a succession plan that positions your institution for future growth. All you have to do is start.

Step 1: Begin Planning
When it comes to planning, there is no such thing as “too early.” Take care during this time to lay down the ground work for how communication throughout the process will work, which will help everything flow smoothly. Lack of communication can lead to organizational disruption.

Step 2: The Emergency Plan
A bank must be prepared if the unexpected occurs. It is essential that the board designates a person ahead of time to take over whatever position has been vacated. The emergency candidate should be prepared to take over for a 90-day period, which allows the board or management team time to institute short- and long-term plans.

Step 3: The Short-Term Plan
A bank should have a designated interim successor who stays in the deserted role until it has been satisfactorily filled. This ensures the bank can operate effectively and without interruption. Often, the interim successor becomes the permanent successor.

Step 4: Identify Internal Candidates
Internal candidates are often the best choice to take over an executive role at a community bank, given their understanding of the culture and the opportunity to prepare them for the role, which can smooth the transition. It is recommended that the bank develop a handful of potential internal candidates to ensure that at least one will be qualified and prepared to take over when the time comes. Boards should be aware that problems can sometimes arise from having limited options, as well as superfluous reasons for appointments, such as loyalty, that have no bearing on the ability to do the job.

Step 5: Consider External Candidates
It is always prudent for boards to consider external candidates during a CEO search. While an outsider might create organization disruption, he or she brings a fresh perspective and could be a better decision to spur changes in legacy organizations.

Step 6: Put the Plan into Motion
The board of directors is responsible for replacing the CEO, but replacing other executives is the CEO’s job. It is helpful to bring in a third-party advisory firm to get an objective perspective and leverage their expertise in succession and search. When the executive’s transition is planned, it can be helpful to have that person provide his or her perspective to the board. This gives the board or the CEO insight into what skills and traits they should look for. Beyond this, the outgoing executive should not be involved in the search for their successor.

Step 7: Completion
Once the new executive is installed, it is vital to help him or her get situated and set up for success through a well-planned onboarding program. This is also the time to recalibrate the succession plan, because it is never too early to start planning.