Succession Planning for the Board: What to Consider


succession-7-6-16.pngBenjamin Franklin is quoted as saying “If you fail to plan, you are planning to fail.” And that old quote couldn’t be more applicable to bank board succession planning, especially nowadays when the industry is undergoing so many significant changes.

Boards today need to be planning for even more technology reliance, new fee-based income generators, tougher regulations, and fewer professionals interested in banking as a career. The days when a bank could rely solely on investors and well-connected business people to guide its direction are almost gone. Instead, tomorrow’s banks will need leadership with expertise in the crucial areas that aren’t directly adding to the bottom line, such as technology, risk, compliance and audits.

There are a lot of moving parts in a bank board succession plan. That’s why we’ve highlighted seven areas to consider that have surfaced from our experiences working with banks and their board succession plans.

Optimize Your Composition: Boards need to find the right people to reflect the strategic priorities of the shareholders. Banks today have moved to finding niche lending areas in addition to traditional banking services to meet growth objectives. It is imperative to build a board that aligns with and is complementary to the bank’s strategic plan. For example, if a bank is transitioning from a branch-focused model to a branchless model, it’s important to incorporate expertise on the board who can guide that transition. Perhaps reducing the number of directors will increase the productivity of the board.

Anticipate What’s Coming: It’s important to understand the changing bank market, including technology and regulatory shifts that are expected in the next three to five years. Understanding this gives banks an opportunity to move out of reactionary situations and become proactive. Having board members with the right experience and forward-thinking approach can help define new potential business lines while adhering to shifting compliance and regulatory demands.

Identify Necessary Skills: Once you have identified coming shifts in the business, it’s important to determine the skills needed to meet those challenges. Beyond driving business, boards should include members who bring a skill set that advances the bank toward its strategic priorities, whether technology, cyber-security, audit, risk and/or compliance. As a bank grows, it should consider bringing on directors who understand more complex banking models. If a bank wants to move into a niche, bringing a board member in with specific experience can help guide the bank in that area.

Consider Investor Expectations: It’s important to keep in mind the fiduciary role the board plays. Investors want to see a committed board qualified to serve, while remaining devoted to the short and long-term success of the bank. Investors today are actively monitoring the governance of banks.

Get a Technology Expert on the Board: It’s time to consider adjusting the board’s composition to complement the capabilities of the next generation of leadership. One big switch between today’s leaders and tomorrow’s will likely be reliance on technology. Technology has been a missing piece on a lot of boards, and as the next generation of leadership takes the helm to steer banks toward more technology-driven services, it will be essential to have a technology expert on the board. This person should not only understand technology, but also understand how to leverage it to connect with customers.

Self-Assess: Directors are increasingly using self-assessments to look for gaps in expertise and skills, some of which could be addressed with training or further development. Assessments can help drive consistent refreshment of the business over time by adding needed skills as the complexity of banking continues.

When it comes to who will lead succession planning for the board, it is typically the governance committee’s responsibility but in privately held banks, the chairman often runs the show on succession planning. As regulators are increasingly asking about director succession, the ownership of the plan will increasingly shift to the independent directors of the governance committee. Knowing when and how often to develop and refresh a succession plan depends on where a bank is in its development. A newer bank will likely review the succession plan for the board more frequently than a more established bank.

Investing in Formal Leadership Development and Succession Planning


succession-6-14-16.pngAs the baby-boomer exodus from the workplace grows in the coming years, many banks will find themselves with a groundswell of leadership positions to fill. Yet a 2015 Crowe Horwath LLP survey of banks found that only about 23 percent of respondents have established a formal leadership program. Without a well designed internal development and succession plan, banks will be forced to scramble.

Building Versus Buying Talent
With banks facing consolidation, regulatory expectations, and similar challenges, leadership planning hasn’t been a priority for many institutions. Twenty-one percent of respondents to Bank Director’s 2016 Compensation Survey say they have no long-term succession plan in place for the CEO, and another 16 percent say they have no plan for the other senior executives.

Some banks have been content to simply buy talent as needed, hiring experienced executives from outside of the organization, rather than take the time to build talent from within. It might seem like a luxury to put an individual in a management position as a development opportunity—better to keep experienced, productive people in their positions as long as possible and then look outside for equal experience when the time comes.

While understandable, this perspective is short-sighted. Promoting from within is far less costly and eliminates business continuity risk. Internal development also helps a bank maintain and reinforce its unique culture and makes it easier to retain high performers and those employees with high potential.

Of course, the board of directors also can present an obstacle to pursuing formal development and succession processes. Boards at banks frequently are populated by members of the traditionalist generation that precedes the baby boomers. They tend to believe that “the cream rises to the top” or in so-called “survival of the fittest”— in other words, those that deserve leadership positions will find their way to them without formal programs nurturing them. But regulators have begun impressing on bank boards the importance of approaching things like succession planning in a more formal way than has been done in the past.

The Role of Generational Differences
Attracting talent and planning for succession is more challenging than ever. Banks that long have depended on the wisdom and work ethic of their senior teams now must attract, develop, and retain millennials (generally, those born after 1980), while engaging their Generation X employees (born 1965-1980), and adapting to the accelerating loss of boomers.

Banks might realize that the exit of boomers will produce a rash of leadership openings, but some don’t seem to grasp that a one-size-fits-all approach to recruiting, retention and leadership development is doomed to fail due to generational differences. For example, millennials have different expectations for their employers and careers than their boomer and Generation X colleagues. They often express a desire for jobs that allow them to help society and maintain a healthy work-life balance. To attract such workers, banks might need to emphasize their community involvement efforts, which could be of less interest to older employees.

Leadership development and succession planning processes also must recognize and reflect generational differences. Millennials, for instance, can be very open to receiving mentoring from their boomer colleagues because they’ve largely had close, positive relationships with their parents. Generation Xers, on the other hand, might have had rockier parental relationships. Gen X workers also came into the job market at a time of downsizing and outsourcing. As a result of these experiences, they can be more resistant to authority figures.

While research has found some distinct generational differences, similarities certainly exist, too. Strong management and leadership appeal to all generations. The good news is that these skills can be effectively taught, mentored and modeled with the assistance of formal processes.

Act Now
A wave of leadership openings is on the horizon, and banks can’t afford to take a reactive stance—they need to plan for the transition to the next generation of leaders. Forming a succession plan and building a pipeline of talent requires time, so institutions should take the first steps now.

This article first appeared in the Bank Director digital magazine.

2016 Compensation Survey: Where Are The Lenders?


compensation-survey-5-10-16.pngThe demise of training programs at the nation’s biggest banks, coupled with an aging Baby Boomer population, is resulting in what could be a mini-crisis for the banking industry. There aren’t enough commercial lenders, according to the bank executives and directors responding to Bank Director’s 2016 Compensation Survey. Without skilled lenders, financial institutions will be hard-pressed to grow their revenue, since lending is still how many banks make most of their money.

Forty percent of survey respondents say that recruiting commercial lenders is a top challenge for 2016. When asked to describe their bank’s efforts to attract and retain commercial lenders, 43 percent say there aren’t enough talented commercial lenders. The same number say they’re willing to pay highly to fill these valuable roles within their organization.

Bank Director’s 2016 Compensation Survey is sponsored by Compensation Advisors, a Gulf Breeze, Florida-based member of Meyer-Chatfield Group. In March, Bank Director surveyed online 262 bank directors, chief executive officers, human resources officers and other senior executives. Fiscal year 2015 compensation data for CEOs and directors was also collected from the proxy statements of 105 publicly traded banks.

Twenty-three percent of respondents say that recruiting younger talent is a key challenge this year. Thirty-four percent say they’re actively seeking talented millennial employees, between the ages of 18 and 34 years, but have trouble attracting them. Of these, 60 percent say that millennials aren’t interested in working for a bank. Fifty-four percent consider their bank’s culture to be too traditional.

One-third have a satisfactory plan in place to attract millennials. The majority of these, at 71 percent, credit a culture that millennials feel comfortable in as the reason for their bank’s success, as well as a clear path for advancement (59 percent) and reputation (55 percent).

The remaining third say hiring millennials is not currently a focus for their institution.

Other key findings:

  • Tying compensation to performance remains the top challenge identified by respondents, at 46 percent.
  • Sixty percent expect the bank’s CEO and/or other senior executives to retire within the next five years. Forty-five percent have both a long-term and emergency succession plan in place for the CEO and all senior executives.
  • Respondent opinions are mixed on the value of equity. More than half of executives, at fifty-four percent, indicate that equity is highly valued as part of their own compensation package, but just 36 percent of all respondents say equity on its own, in the form of stock options or grants, is an effective tool to tie executive interests to that of shareholders. Fifty-three percent of CEOs received equity grants in 2015.
  • Forty-five percent of respondents indicate that their board most recently raised director pay in 2015 or 2016.
  • Almost half of respondents indicate that three or more board members will retire from their position in the next five years.
  • Sixty-seven percent indicate their bank has a plan in place to identify prospective new directors.
  • Sixty-three percent say their bank will actively seek to create a more diverse board in the next two years.

To view the full results to the survey, click here.

Four Reasons Why Waiting to Sell May Be a Bad Idea


bank-strategy-2-5-16.pngMost community banks have a timeframe for liquidity in mind. Strategic plans for these institutions are often developed with this timeframe as a key consideration, driven by the timing of when the leader of the bank is ready to retire.

We meet with a lot of bank CEOs, and we regularly hear some version of the following: “I’m in my early 60s and will retire by 70, so I’m looking to buy not sell.” When we ask these CEOs to describe their ideal acquisition target, the answer often involves size, market served, operating characteristics and, most importantly, talent. After all, banking is a relationship business and great bankers are needed to build those relationships with customers. Buyers will undoubtedly pay a higher premium for a bank with great talent that still has “fire in the belly.” It is hard to recall a time when a buyer was looking for a tired management team ready to retire. So, it seems ironic that a buyer cites talent as the key component to a desirable acquisition candidate, but that same buyer is planning to wait until retirement to sell. Put differently, they’re planning to sell at the point their bank will become less desirable.

We have highlighted four key items for boards and management teams to consider when evaluating the timing of a liquidity event as part of the strategic planning process: the timing of management succession, likely buyers or merger partners, shareholders and the overall economy and market for community banks.

Management Succession
Timing of management succession is critical to maximize price for shareholders. As referenced above, if the leadership of an organization would like to retire within the next five years, and there isn’t a logical successor as part of senior management, the board should begin evaluating its options. Waiting until the CEO wants to retire may not be the best way to maximize shareholder value.

Likely Buyers/Merger Partners
The banking industry is consolidating, which means fewer sellers and buyers will exist in the future. While there may be a dozen or more banks that would be interested in a good community bank, once price is considered, there may only be one or two banks that are both willing and able to pay the seller’s desired price. These buyers are often looking at multiple targets. Will a buyer be ready to act at the exact time your management is ready to sell? In fact, there are a number of logical reasons that your best buyer may disappear in the future. For example, they could be tied up with other deals or they may have outgrown the target so it no longer “moves the needle” in terms of economic benefit.

Shareholder Pressure
Shareholders of most banks require liquidity at some point. While the timing of liquidity can range from years to decades, it is worthwhile for a bank to understand its shareholders’ liquidity expectations. And liquidity can be provided in many ways, including from other investors, buybacks, listing on a public exchange, or a sale of the whole organization. As time stretches on, pressure for a liquidity event begins to mount on management and, in some cases, a passive investor will become an activist.

Overall Economy and Markets
With the Great Recession fresh in mind, virtually every bank investor is aware the market for bank stocks can go up or down. Before the Great Recession, managers who were typically in their mid-50s to early 60s  raised capital with a strategic plan to provide liquidity through a sale in approximately 10 years, which would correspond with management’s planned retirement age. We visited with a number of bankers in their early 60s from 2005 to 2007 and indicated that the markets and bank valuations were robust and it was an opportune time to pursue a sale. Many of these bankers decided to wait, as they were not quite ready to retire. We all know what happened in the years to follow, and many found themselves working several years beyond their desired retirement age once the market fell out from under them.

Over the past two years, we had very similar conversations with a lot of bankers and once again we see some who are holding out. While bankers and their boards generally can control the timing of when they would like to pursue a deal, the timing of their best buyer(s), the overall market and shareholder concerns are beyond their control. Thorough strategic planning takes all of these issues into account and will produce the best results for all stakeholders.

Talent Management at the Top


U.S. Bancorp emerged from the financial crisis as a desirable workplace for talented employees, enabling the bank to better attract and retain talented employees. In this presentation, Jennie Carlson, executive vice president of human resources, outlines U.S. Bancorp’s transparent and analytical process to identify, reward and engage top employees. Millennials are changing how banks groom the next level of executive talent, which includes an increased commitment to diversity. 


How to Get the Most out of Your Annual Reviews


annual-review-12-14-15.pngThere has never been a more challenging time to be a bank director. The combination of today’s hugely competitive banking market, increased regulatory burden and rapid technological developments have raised the bar for director oversight and performance. In response, an increasing number of community banks have begun to assess the performance of directors on an annual basis.

Evaluation of board performance is done in many ways, and ranges from an assessment by the board of its performance as a whole to peer-to-peer evaluation of individual directors. Public company boards are increasingly being encouraged by institutional investors and proxy advisory firms to conduct meaningful assessments of individual director performance. The pace of turnover and change on most bank boards is slow, and more often the result of mandatory retirement age limits than focus by the board on individual director performance. This may be untenable, however, as the pace of external change affecting financial institutions often greatly exceeds the pace of changes on the bank’s board.

While some institutions prefer a more ad hoc approach to assessing the strengths and weaknesses of the board and its directors, we suggest that a more formal approach, perhaps in advance of your board’s annual strategic planning sessions, can be a powerful tool. These assessments can improve communication between management and the board, identify new skills that may not be possessed by the current directors, and encourage engagement by all directors. If used correctly, these assessments often provide valuable information that can focus the board’s strategic plan and help shape future conversations on board and management succession.

So what are the key considerations in designing an effective board evaluation process? Let’s look at some points of emphasis:

  • Think big picture. Ask the board as a whole to consider the skill sets needed for the board to be effective in today’s environment. For example, does the board have a director with a solid understanding of technology and its impact on the financial services industry? Are there any board members with compliance experience in a regulated industry? Does the board have depth in any areas such as financial literacy, in order to provide successors to committee chairs when needed? Do you have any directors who graduated from high school after 1985?
  • Develop a matrix. Determine the gaps in your board’s needs by first writing down all of the skill sets required for an effective board, and then chart which of those needs are filled by current directors. Then discuss which of the missing attributes are most important to fill first. In particular, consider whether demographic changes in your market will make recruiting a diverse and/or female candidate a priority.
  • Determine the best approach to assessment. Engaging in an exercise of skills assessment will often focus a board on which gaps must be filled. It can also focus a board on the need to assess individual board member performance. Many boards are not prepared to launch into a full peer evaluation process, and a self-assessment approach can be a good initial step. Prepare a self-assessment form that touches upon the aspects of being an effective director, such as engagement, preparedness, level of contribution and knowledge of the bank’s business and industry. Then, have each director complete the self-assessment, with a follow-up meeting scheduled with the chair of the governance committee and lead independent director for a conversation about board performance. These conversations are often the most impactful part of the assessment process.

In addition to assessing the human capital needs of the board, several other topics should be raised in most board assessments.

  • Communication between management and the board: As demands on the board change, providing directors with the same board packets and agenda as ten years ago may not make sense. Soliciting thoughts on how the content and presentation of board materials could be more helpful and whether the board’s agenda should change is a good exercise for any institution.
  • Buy, sell or hold? While strategic matters are best addressed through group discussion, gauging directors’ views on the strategic direction of the institution can also help shape the tenor of the board’s future discussions. Understanding individual directors’ justifications for a potential sale as part of the assessment process may allow for solutions short of a sale of the bank.

Board assessments are a key component of a healthy board environment, as they can provide management and the board with insight into the true feelings of the board of directors on a variety of issues. Careful evaluation of which assessments to utilize and the timing in doing so can allow a board to better adapt to a rapidly changing marketplace.

A Look Ahead to 2020: How Bank Directors Can Guard Against Risk


risk-12-11-15.pngAs banks look to the year 2020, we’ve identified five key risks that need to be actively assessed and monitored as the industry changes and adapts to consumer demands and competition. When it comes to data security and technology, regulatory risk, finding qualified personnel, profitability, and bank survival, bank directors need to ask:

  • How do we as an organization identify these risks on an ongoing basis?
  • How do they affect our organization?
  • How can we work with management to manage future risks?

Here’s a snapshot of the risk areas, what’s anticipated as we look to the future, and steps you can take to stay competitive and mitigate risk.

Data Security & Technology
It’s important to keep up with your peers and provide services as your clients demand them. More sophisticated payment platforms that make it easier to access and transfer funds will continue to gain popularity, particularly mobile platforms.

Being competitive requires innovation, which means software, bank integration, and sophisticated marketing and delivery. Third-party service providers may be the answer to help cut expenses and improve competition, but they also present their own unique risks.

With innovation comes opportunity: attacks on data security will increase, making the safeguarding of data a high priority for banks. While technology is an important element to this issue, the primary cause of breaches is human error. To this end, it’s essential for management to set the example from the top while promoting security awareness and training.

Regulatory Risk
Expectations from the Consumer Financial Protection Bureau regarding consumer protection will intensify. Anticipate some added expenditure to hire and retain technical experts to manage these expectations. Regulations are on the way for small business and minority lending reporting, as well as the structure of overdraft protection and deposit product add-ons, among others. Directors and management need to evaluate:

  • Compliance management infrastructure
  • Staffing needs and costs
  • Impact of proposed regulatory change to the bottom line

Qualified Personnel
For instance, baby boomers are retiring at a rate faster than Generation X can replenish, making it more difficult and costly to attract and retain skilled people. Meanwhile, the shrinking availability of skilled labor in this country is costing organizations throughout the United States billions of dollars a year in lost productivity, increased training and longer integration times.

A bank’s succession plan for its people should:

  • Identify key roles and technical abilities in your organization
  • Assess projected employee tenure
  • Develop a comprehensive employee replacement strategy
  • Prioritize training and apprentice programs

Profitability
The bottom line at traditional banks will continue to be stressed as momentum builds for institutions to reduce product and service-related fees. Overhead expenses also will continue to increase as banks boost spending for IT infrastructure to support demands by customers for mobile technology and technical innovation and finding and retaining qualified personnel to manage complex regulatory requirements. Responses to these trends are already underway. Some institutions are:

  • Divesting of consumer-related products laden with heavy regulatory requirements
  • Sharpening strategic focus on holistic customer relationships with professional and small business customers to increase relationship-driven revenue
  • Exploring new or more complex commercial lending products and partnerships designed to increase interest income to attract customers in new markets

Banks will need to closely monitor the impact of regulatory initiatives on future earnings from fees and alternative revenue sources.

Bank Survival
Here are some proactive steps to consider as your bank prepares for 2020:

  • Develop an ongoing strategy for mergers and acquisitions to expand capital
  • Consider charter conversions to lend flexibility in expanded product and service offerings or a change in regulatory expectations or intensity
  • Evaluate the impact of higher regulatory expectations

To help identify and manage risk, management should plan regular discussions in the form of annual strategic planning meetings, regular board meeting agendas, and targeted meetings for specific events. The focus should extend beyond known institutional risks, such as credit, interest rate and operational, but should also look at key strategic risks.

If your institution can innovate with the times to stay ahead of risk and competition with a systematic approach, then the path to 2020 will be less fraught with difficulties.

Succeeding With Your Succession Plan


succession--12-2-15.pngOne of the areas of corporate governance that is receiving increasing focus by regulators and investors is succession planning. Succession planning is important at the board and management level and is especially challenging for community banks that do not normally have the bench strength to choose from a wide talent pool. Often the principal challenge is to incentivize potential successors to remain in a subordinate position while at the same time transitioning a CEO to retirement.

Integration of the Succession Plan
Corporate governance documents should be reviewed and revised if necessary to identify the appropriate members of the board that will adopt and administer succession guidelines. This is typically the governance committee or the compensation committee. The guidelines should be reviewed by counsel to assure that they do not create unintended expectations or rights that are not consistent with exiting plans and contracts. Employment contracts should be revised to clarify the obligation of senior executives to ensure succession development of identified officers.

It is not uncommon that a specific duty to cooperate and implement the succession of a subordinate according to an agreed upon schedule be made part of the contract. Position descriptions should support and facilitate an evaluation of the candidates’ potential for advancement. Further, term provisions should be revised to contemplate expected retirement dates. Short-term bonus plans are a particularly useful method to incentivize cooperation in the development of subordinate executives. A key metric in determining performance of a senior executive should be his or her skills in mentoring and developing subordinates.

Retaining the Next Generation of Bank Leaders
While the mentoring relationship is key, it is often the case that senior executives who are considered the likely successor for the next level, be it CEO, COO or CFO, are lured away by competitors who can offer more immediate advancement. This is sometimes due to the ambition and impatience of the junior executive but also the resistance of the incumbent. There are a number of legal arrangements that can reduce the risk of this occurring. In general, once a designated successor is identified, that person should be granted unvested stock or cash which will vest fully upon their promotion. This is a critical stage as the CEO and board must work closely together to ensure the candidate is prepared to carry the full responsibility of the senior executive. This could take several years and involves familiarizing the candidate with key customers, regulators and the board.

In the event the candidate is not promoted but an outside candidate is chosen, a succession plan agreement would cause a significant portion of the unvested benefits to vest and the candidate would have a window to determine if he or she would remain with the bank. This should have the effect of causing most candidates to resist any capricious impulses to forego the final laps on the succession track and make it more expensive for competitors to raid key talent. It is also the fair thing to do, as the candidate is not guaranteed that he or she will succeed to the desired position but is being asked to remain loyal and forego outside opportunities at the point in the career path where he or she is most attractive to outside companies. It also should allay any fears concerning the risk that an 11th hour outside candidate will be chosen.

Transitioning Retirement of the Senior Executive
For every CEO who has dragged his or her feet in agreeing to a retirement date, there are boards who refuse to accept the planned retirement date given by the CEO. This is human nature, but good corporate governance demands that specific provisions be put in place that counteract this tendency.

While the succession plan if properly administered should groom a successor who at the proper time is ready to replace the incumbent CEO, there need to be specific provisions that ensure that the incumbent is incentivized to facilitate the transition at that time. It is not unusual to execute a transition and retirement agreement with the CEO. The agreement would amend existing agreements and plans to include, among other things, accelerated cash and stock benefits, a lump sum payout of remaining salary, contract benefits and describe a transitional role for the CEO. It could continue health and welfare benefits. This would be in addition to any retirement benefits.

Conclusion
Succession planning is often neglected until it becomes a serious issue because of a sudden departure of a executive. Boards must work harder to ensure that the bank has a dynamic succession plan in place to meet the competitive challenges of the future.

Compensation and Governance Committees: Sharing the Hot Seat in 2016


hot-seat-11-19-15.pngThe compensation committee has been on the hot seat for several years. Outrage regarding executive pay and its perceived role in the financial crisis has put the spotlight on the board members who serve on this committee. Say-on-pay, the non-binding shareholder vote on executive compensation practices, was one of the first new Securities and Exchange Commission (SEC) requirements implemented as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. Since that time, public companies have responded to shareholder feedback and changed compensation programs and policies to garner support from shareholders and advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co. In recent years, only 2 percent of public companies have “failed” their say-on-pay vote. The significant majority of public companies (approximately 75 percent of Russell 3000 companies) received shareholder support of 90 percent or greater during the 2015 proxy season. Today, companies with less than 90 percent should increase their shareholder outreach, as a dip below that level is often an indicator of emerging concerns.

Compensation committees can’t sit back and relax on these results. The SEC’s proposed rule for pay versus performance disclosure (published in April) and the final rule for the CEO pay ratio (published in August) will further intensify the focus on executive pay and require compensation committees to dedicate much more time and energy to evaluate and explain their pay decisions in light of these new disclosures. Fortunately, implementation of the CEO pay ratio is delayed until the 2018 proxy season while the SEC has not yet adopted final rules for the pay versus performance disclosure (as of September). It is hard to predict what influence these additional disclosures will have on shareholders’ say-on-pay votes. What is clear is that boards will need to monitor these and other pending Dodd-Frank Act rules (i.e. mandatory clawback, disclosure on hedging policies, incentive risk management) in the coming year.  

In the meantime, however, boards may face increased shareholder scrutiny in key governance areas.

Proxy access, the ability of significant shareholders to nominate board members on the company’s proxy ballot, achieved momentum in 2015 when New York City Comptroller Scott Singer submitted proxy access proposals at 75 public companies as part of his 2015 Boardroom Accountability Project. We expect proxy access proposals will remain a focus among activist shareholders during the 2016 proxy season. Dissatisfaction with executive compensation and board governance are often the reasons cited by shareholders seeking proxy access.

Institutional shareholders and governance groups have also started to focus on board independence, tenure and diversity. Institutional investors such as Vanguard and State Street Global Advisors consider director tenure as part of their voting process and ISS includes director tenure as part of their governance review process. This could lead to a push for term and/or age limits for directors in the near future. While many companies use retirement age policies as a means to force board refreshment, it is unclear if that will be enough. Boards would be wise to start reviewing their board composition and succession processes in light of their specific business strategies but also in consideration of these emerging governance and shareholder perspectives.

The intense scrutiny by investors and proxy advisors of public companies’ compensation and governance practices shows no signs of abating. Bank boards will need to develop their philosophies, programs and policies with an acknowledgement of emerging regulations and perspectives. Board composition and processes such as member education, evaluation, nomination and independence will gain focus. Executive pay levels and performance alignment will continue to be scrutinized based on new disclosures mandated by Dodd-Frank. The spotlight on pay and governance is not winding down, but rather widening and both the compensation and governance committees will need to spend more time addressing these issues in the years to come.

Banks Grapple With Succession Planning


succession-planning-11-18-15.pngLike other banks, U.S. Bancorp has an emergency succession plan for its CEO and other critical jobs at the senior executive level. Jennie Carlson, executive vice president for human resources, prefers to call it the “win the lottery” plan, rather than the “got hit by a bus” plan. It just sounds better. The plan identifies who could take over temporarily if something happened to that executive.

The Minneapolis-based $416 billion asset company, whose subsidiary is U.S. Bank, also has a long-term succession plan, where potential successors for the CEO suite are developed internally and where their responsibilities are progressively increased over time as their skills and abilities are assessed by current CEO Richard Davis and the board. Banking is not rocket science. But the soft skills are hard to teach, Carlson said at Bank Director’s Bank Executive and Board Compensation Conference last week in Chicago. “What we can’t teach is intellectual curiosity, balanced risk management, loyalty and commitment,’’ she said. “That’s what we’re looking for in successor candidates.”

This process is exactly what the bank used when it hired Davis. He had been a line of business manager, and was steadily promoted to a series of bigger jobs at the organization. Succession planning is a transparent process for U.S. Bancorp. Although Carlson said she doesn’t want to encourage a horse race, the candidates know they are in the running for the CEO job, and that they are being given increased opportunities and responsibilities as they learn about the job, the board, and other parts of the company that they aren’t familiar with. The bank prefers to hire from a list of internal candidates, although it does keep track of external possibilities, she said.

Another bank that prefers to hire for the C-suite internally is $2.2 billion asset Souderton-based Univest Corp. of Pennsylvania. CEO Bill Aichele said during a panel discussion at the conference that he retired last year after a lengthy succession plan. The chief financial officer become the new CEO after several years of planning and promoting him. Another individual who was in the running to succeed Aichele was not chosen after 22 years with Univest. He subsequently left the company. “The board made the tough decision based on the skills sets and the ability to succeed me and lead the company,’’ Aichele said. He said the bank continues to work proactively to train and promote internally for the top leadership roles. One employee is getting his executive management courses at a local college paid for by the bank, at a cost of $15,000. Good succession planning, he said, takes careful planning “and yes, a big investment in education.”

Regulators have the greatest interest in a bank’s emergency succession plan, said Don Norman, a partner at Chicago law firm Barack Ferrazzano. “This is about keeping the doors open,’’ he said. Banks should create a document listing three to five critical positions, with candidates for each one. But he has seen one bank come up with a list of 40 positions and potential emergency candidates for each one, and there is no reason why you shouldn’t come up with a list based on your own needs. Banks should consider questions of potential candidates: What are their skill sets? Do they have the ability to immediately step in?

You may not have the same candidates in an emergency plan as in a long-term plan. During an emergency, you might have to use a retired CEO, for example, which is not the candidate for your long-term succession plan. For longer term plans, what’s your action list or timeline? How will this process tie into management development programs? Who owns the process? Normally, the governance committee works with the CEO to develop candidates. How often should your plan be updated? What are the pay considerations? Contracts will need to be signed to incentivize your candidates to stay with your company, perhaps with stock that vests over time.

Banks may eventually find that younger generations have different needs when it comes to succession planning. Carlson expects millennials to change the process from previous generations. (Millennials are the 80 million or so people in their late teens to early 30s.) She says they generally want to know their potential career paths and what they should do to further their career goals. Hiring managers will have to be clear and explicit with this next generation. “Baby boomers were willing to have unspoken promises,’’ she said. “Millennials aren’t going to do that.”

For more on succession planning, see “Getting Succession Planning Right” in the June Talent issue of Bank Director digital magazine, available as an app for your tablet or phone at no charge.