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. 

What Bank Directors Are Worried About Now


Apparently, bank directors are a very worried bunch. Nearly 20 members of Bank Director’s membership program responded to the question posed in last month’s newsletter: “What worries you most about the future?” We’ve compiled a word cloud that shows which words came up most often in bank directors’ responses, followed by direct quotes.


Four Topics to Add to Your Summer Compensation Committee Agenda


7-16-14-article.pngProxy season has recently ended, and the beginning of the third quarter marks the start of a new compensation planning season. The summer meeting of a bank’s compensation committee is an ideal opportunity to reflect on the previous compensation cycle and to consider the next—often by focusing on topics like proxy season trends, pending regulatory/legislative and other emerging compensation issues. However, the summer committee meeting can also be used to focus on issues of more strategic importance to the bank. Consider adding one or more of the following topics to your summer discussions to increase your committee’s effectiveness over the upcoming year.

  1. Succession Planning
    Our experience in working with community banks is that many board members do not view succession planning as a high priority issue. They either don’t view retention of their CEO as a risk, and/or their CEO is still several years away from retirement. As a consequence, many directors cannot articulate what would occur if a CEO’s departure, death or disability left the bank suddenly leaderless.

    Considering that it takes several years to develop and cultivate a CEO successor in the best circumstances, boards should identify potential candidates to succeed the CEO long before he or she retires. High-potential executives are always in demand, and developing your bench will strengthen the team and mitigate the risks associated with unexpected and unwanted executive turnover.

    And even if long-term cultivation of candidates is less of a priority right now, an emergency CEO succession plan should be a requirement for all organizations, to mitigate the business continuity risk should tragedy strike. An emergency CEO succession plan will minimize board deliberations and discussions of interim CEO candidates in crisis situations by articulating a structured process (the timing of internal and external communications and board decisions), as well identifying one or more interim CEO candidates (who could come from the senior leadership ranks or the board).

  2. Pay-for-Performance Analysis
    The most common pay-for-performance analysis retrospectively evaluates historical financial performance and total shareholder return relative to actual compensation received by the CEO (and potentially other proxy executives), compared against the performance and pay of peer companies. Simply put: did the incentive programs deliver appropriate pay for the performance results achieved?

    Summer is an effective time to discuss these pay-for-performance results with the committee, since pay data for peers is publicly available following the end of proxy season. The results may encourage further discussions about the organization’s compensation philosophy, and especially the effectiveness of incentive plans in supporting your business strategy and results.

  3. Compensation Philosophy and Peer Group
    Wholesale changes in compensation philosophy from one year to the next are rare, but as your bank’s business strategy evolves, your compensation philosophy ideally will evolve as well. For example, as a business strategy evolves from growth to profitability (or vice versa), the corresponding compensation philosophy should consider re-weighting incentive plan metrics to more effectively support such a change in priorities.

    Peer group changes are less frequent in banking than in other industries, but your peer group may require re-evaluation if the bank has grown significantly, or changed business focus (for example, geographic footprint, or retail vs. commercial lending). Likewise, continued industry shifts (mergers, business shifts, etc.) require an annual review to ensure that peers are still a good “fit” with the bank.

  4. Committee Meeting Calendar and Agenda
    A compensation committee’s summer meeting tends to include fewer time-sensitive items than most other meetings. It is an ideal time to review your annual committee meeting calendar and standing agenda items relative to the committee charter. Work collaboratively with your executive team and outside advisors to ensure that no key issues are overlooked, and that items are spaced throughout the year to allow enough time for consideration of relevant information and thoughtful deliberation prior to key decisions.

Remember that the purpose of your executive pay programs is to support and reinforce your bank’s business strategy. Proactive planning of your meeting calendar and agenda will ensure your committee is addressing all its compliance-related requirements, while allowing sufficient time to thoughtfully consider strategic implications of compensation design decisions.

To find a full year’s Compensation Committee agenda items for community banks in our recently published document, Managing an Effective Compensation Committee Calendar for Community Banks, go here.

The Board’s Role in Succession Planning


10-23-13-Barack.pngGiven the increase in shareholder activism and regulatory oversight, financial institutions have to revisit succession planning as part of their governance practices. What if your CEO, or other senior executives, cannot continue to perform in their roles? Your shareholders and regulators want to know that you have in place a solid plan of action if called upon in an emergency or as part of your long-term vision.

Because succession planning is not a new idea, only a recent hot topic, you may already be familiar with it. You may already do it consciously or without realizing it. In either case, you are a step ahead. Whether you are in the lead or still a bit behind, it is a good idea to consider a few issues with respect to succession planning.

Fiduciary Duty

Directors have a fiduciary duty to work toward identification and mitigation of major business risks, including the loss of senior executives. Turnover can be unforeseen and immediate or it can be expected and deliberate, or somewhere in between. The board must consider its possible impact on the company. In addition to considering a CEO successor, the board should also consider other key positions like the chief financial officer, chief operating officer, division heads and other key officers.

Succession Planning for Executives

There are no set rules for succession planning. The board has free reign, but should focus its efforts to be productive. An initial step would be to open dialogue with the most senior executives within the company. Ask if they have given thought to their own long-term plans. Ask their thoughts on succession. Ask about contingency plans. After the board understands where the company is, it can begin to develop a plan to get the company where it should be. In developing its plan, the board should consider:

  • Will succession planning be a task for the entire board or a committee?
  • Will the CEO be “on board” with the effort?
  • What are the short- and long-term business needs that the plan must meet? Is there a specific timeline?
  • Is it best to have separate short-term and long-term plans?
  • For which executive officer positions is a plan most critical?
  • What skills and experience are required for each position?
  • Has the incumbent identified any potential successors?
  • Does the potential successor require additional training or professional development?
  • If the incumbent has not considered succession planning, how does the board evaluate potential successors? Should the process be different for internal and external candidates?
  • Does the board need the assistance of external advisors to successfully implement its plan?

Once established, it is critical for the board to regularly revisit its succession plan. In order to stay on course, the board should consider scheduling time quarterly to discuss progress toward the plan.

Also, the board must guard against the process turning negative. A mishandled attempt at succession planning can lead to bruised egos and weakened morale, especially among internal candidates passed over for promotions. The board should strive for a process that allows potential successors to understand they are critical to the organization and what they need to do to continue to grow within the organization. At the same time, the board needs to avoid creating an overly competitive environment that fosters discord and animosity among executive team members.

Succession Planning for Directors

Not only must a board of directors address the risks associated with executive succession, it must also look internally at director succession to ensure that the composition of the board continues to satisfy the changing needs of the company. Self-assessment and evaluation should be part of the board’s annual process leading to the recommendation of the slate of directors for the annual shareholder vote. The board should view director succession in the short-term and long-term. It is somewhat unsettling that the most commonly cited form of board succession planning is a mandatory retirement age. That is not enough. Boards must consider the qualitative skills required to serve as a director, where people with such skills can be found and how they might be attracted to board service. Finding individuals who are willing to serve as board members is an increasingly difficult task, but not an impossible one. Proper planning will go a long way toward ensuring that your board of directors remains vital.

Succession at the Top: Lessons Learned from CEO Transitions


10-11-13-Kaplan.pngThere is no more vital decision for a bank and its board of directors than choosing who leads the organization. Yet leadership succession represents a growing challenge, as banks too often lack sufficient executive depth or proper succession planning. In the worst cases, banks with both weak succession and performance issues may even be encouraged to find a merger partner.

Having conducted more than fifty CEO/succession search assignments, we have clearly seen that superior talent really does make a difference, especially for banks intending to remain long-term survivors. From those accumulated client experiences, we have identified the following seven lessons learned from CEO transitions:

Lesson #1: Succession Really Does Matter!
It is imperative that boards exercise their fiduciary and governance responsibilities, and grapple with the challenges of leadership succession. The continuity of leadership promotes continuity of strategy, and both regulators and governance activists are more focused than ever on succession. There is also a growing body of information which affirms that a lack of planned orderly succession can have a significant impact on the value of the company.

Lesson #2: Identify the Obstacles to Succession Planning.
Who is the stumbling block to planning for the bank’s future leadership? Is it the CEO who refuses to accept that he/she will not live forever, or are there directors who do not want to raise this issue with their friend the CEO? The board has a responsibility to tackle succession no matter how awkward it may be, so have these conversations early and often.

Lesson #3: The Succession Process Is as Important as the Outcome.
A robust, thoughtful and thorough succession process adds huge credibility to the board and the bank, regardless of whether your successor comes from within or outside of the bank. Take the time up front to ensure the alignment of your organization’s strategic plan with the ideal profile of your next CEO. The board can’t spend too much time getting to know its future leader.

Lesson #4: You Really Can Do It! Develop Your Own Methodology and Timeline.
Each succession situation and timeline is different, so there is no definitive template to follow. That being said, I would suggest boards begin efforts no less than 30 to 36 months before a potential transition of leadership. It is also very helpful to formally anoint a succession committee of the board (note: this is not a search committee) to take ownership of this process and manage the many critical elements along the path. That makes the succession effort more manageable and provides for accountability.

Lesson #5: It Is Critical to Handle Potential Internal Contenders Well.
Ideally, your succession planning process will promote the development of several internal contenders, and it is important to manage their expectations from the beginning. Handling internal contenders well has a significant impact on how they feel about the company, and how they see their future in the organization. Position the entire exercise as a developmental opportunity, and provide constructive feedback and specific recommendations for folks who are not selected for advancement.

Lesson #6: The Building Blocks of Talent Development Make a Big Difference Over Time.
Nearly all of the data on succession reinforces the idea that well developed internal successors perform better than outside hires. Thus, efforts to groom high potential candidates for more senior roles should be ongoing. Create a personal development plan for each individual with upside potential. Help them develop stronger and more varied technical skills, as well as more training in soft skills. Whatever talent development efforts you initiate, they will make your business stronger and aid the retention of your rising stars.

Lesson #7: Avoiding the Challenges of Succession May Have a Huge Downside.
Research from FTI Consulting shows that 43 percent of CEO transitions are unplanned. The bank’s value can be impacted by unexpected leadership changes, and such changes can make the bank more likely to sell out.

Institutions that we have seen survive and thrive over a lengthy time horizon have benefitted from the successful execution of strategy, which flows from a continuity of leadership. Bank boards of directors and incumbent CEOs must recognize this imperative, and regularly focus on succession and talent at the top of their agendas.

M&A Case Study: How Selling For Less Created More Value



Selling for a premium is not the only strategy. Kevin Hanigan, CEO of ViewPoint Financial, and C.K. Lee, managing director at Commerce Street Capital, describe the creative strategy behind their 2012 M&A transaction in Texas that solved a management succession problem at ViewPoint and provided liquidity for Highlands shareholders.

Video Length: 45 minutes

Highlights include: 

  • The problem facing the board at Highlands Bancshares Inc.
  • Thinking outside the box – three growth options to weigh
  • Key lessons learned from the deal

About The Presenters:

Kevin Hanigan is president and CEO of ViewPoint Financial Group, Inc. and ViewPoint Bank, positions he has held since completion of the merger of Highlands Banchares, Inc. Prior to ViewPoint, Mr. Hanigan was the chairman and CEO of Highlands Bancshares. His experience in Texas banking spans three decades and includes numerous leadership and management roles.

C. K. Lee is a managing director in the financial institutions group, capital markets division of Commerce Street Capital, LLC. In that capacity, Mr. Lee assists financial institution clients with M&A, capital raising, balance sheet restructuring, business plan development and regulatory matters. In addition, he provides regulatory advisory support to the private equity fund management team. Prior to joining Commerce Street in June 2010, Mr. Lee was regional director for Office of Thrift Supervision’s (OTS) Western region headquartered in Dallas, with offices in Seattle, San Francisco and Los Angeles.

Succession Planning for the Board


Kaplan_1-18-13.pngLeadership succession represents a growing challenge for community banks—and their boards of directors—especially in the current environment.  Far too often, banks lacking sufficient executive talent or proper management succession are scrutinized by their regulators. In the worst cases, some banks may even be encouraged to find a merger partner. This dynamic has played out too many times during my 25 years in executive search serving the banking industry. Thus, one thing stands out clearly—talent matters.  Superior talent really does make a difference, especially for banks intending to remain long-term survivors.

Think about how commoditized and seemingly similar many bank products have become.  Plus, given the broader array of financial services firms, such as mutual fund companies, credit unions, brokerage firms—all of which offer redundant or wanna-be products—how is the customer to decide with whom to do business? What sets our most successful clients apart from their competitors today is less about strategy and differentiation, and more about how well they execute that strategy. And these clients know that the variable factor around execution nearly always comes down to people.

Despite decades of well written books and Harvard Business Review articles, few companies remain fully committed to fundamental business activities such as leadership development, talent management, grooming high potentials, and overall people enhancement.  Furthermore, nearly every piece of research regarding leadership succession validates that internally groomed successors almost always perform better and cost less than outside hires.  It might seem antithetical for a professional executive recruiter to encourage clients to develop their own talent, but facts are facts. Still, too many of our clients either make a half-hearted effort at talent development, or nibble at the outer edges until the next round of expense cuts.

Developing talent for the long run should not be daunting, and does not require huge amounts of funding.  What it does require is a commitment to the process of developing future leaders throughout your institution. Becoming what’s known as a learning organization requires a mindset shift that may take years to root deeply, yet pays huge dividends over the long term.  Plus, the option to look outside for executive talent—whether for a strategically critical role or to deal with succession challenges—always exists. It should remain just that—an option—but not a necessity.  Here are seven action steps for bank directors and incumbent CEOs to emphasize with their talent agenda:

1. Make discussion of the bank’s talent and leadership development activities a regular agenda item at board meetings—not just annually, but at least quarterly.

2. Hold the current CEO and other executive leaders accountable for grooming their successors. Linking a meaningful portion of executive incentive compensation pay to the achievement of these goals will provide appropriate motivation.

3. Don’t be afraid of selectively using some outside experts, such as an executive coach or organizational development professional, to assist. Your senior leadership team might be good, but support them with the right tools to help them develop their people.

4. Developmental opportunities should involve more than traditional up-the-org-chart advancement. Much learning can be accomplished via lateral moves, special project assignments, add-on responsibilities and the like. Think outside the box when it comes to stretching your people.

5. Let your up-and-comers know that they matter. Your handful of rising stars want to hear it, and letting them know that they have a bright future ahead may do more to retain these high potentials than anything else you may offer.

6. Shift your compensation programs to a pay-for-performance orientation, and reward your best performers appropriately. Giving everyone the same raise regardless of performance creates a disincentive for high-impact players.

7. Don’t ignore succession at the board level. Director succession may be the most sensitive topic in your boardroom, but that doesn’t mean that it shouldn’t be put on the table.  Make director development or board repopulation a regular agenda item as well. Board skills need refreshing and updating too.

The institutions that survive and thrive over a lengthy time horizon benefit from the successful execution of strategy which flows from a continuity of leadership. CEOs and boards of directors must recognize this imperative, and regularly prioritize talent at the top of their agendas.

What Keeps Bankers Up at Night


exhausted.jpgEvery industry has plaguing problems that just don’t go away. The fact that most of the issues with banking tend to turn into headlines only intensifies the anxiety we feel each day. Recently, Bank Director and Meyer-Chatfield Compensation Advisors conducted the 2012 bank director compensation survey to get first-hand information on the issues and trends regarding pay at the board level.

What Are the Stress Points on Bank Boards? Looking past the headlines, the survey enables us to get inside the heads of directors across the country to see what’s really concerning them.  Here’s what we saw as recurring issues in the banking industry:

  • Employee Retention
  • Succession Planning
  • Tying Compensation to Performance

Investing in Key Employees

Bankers are worried about losing key employees. At Meyer-Chatfield Compensation Advisors, we’ve seen a big increase in employee departures at companies around the country. There are triple digit increases in turnover on both the chief executive officer and chief financial officer level, with average turnover of about 37 percent in the CEO role and 75 percent for the chief financial officer. We’re seeing a 94 percent increase in turnover from the C-Suite down through corporate vice president levels.  Those are some pretty staggering numbers.  As the numbers continue to soar, bankers are concerned that their employee retention programs may not be strong enough to keep the employees they need. They are worried they’ll lose their best employees to the competition. Plus, with increased government regulations, many key executives are frustrated by the restrictions on the banking industry and are taking their talents to industries that are less scrutinized by government regulators. A trend we’re seeing is younger executives jumping ship in order to work for industries with less bureaucracy for higher pay.

Who’s Next?  Are Succession Plans in Place?

Another concern that is closely related to retention is succession planning. Many banks recognize that they have an aging executive team. Are younger executives being groomed for the next step?  And have banks done enough to retain new talent to keep them on board? Few things are as disruptive to a bank as a shake-up in the senior ranks. Without a succession plan, a bank cannot act quickly to attract talent and it runs the risk of losing other key members of the team. 

Banks in rural areas are also challenged by the higher amounts required to provide the salary and compensation packages that can attract the level of employees they need to thrive.  Compensation packages that were acceptable by a previous executive may not be suitable for the replacement. The local talent pool may not provide the right candidates and going outside the market costs money that some banks can’t afford. But not having the right talent in place can be much more costly.

Knowing How Compensation Can Help

The final issue that is at the core of most bankers’ angst is in understanding how compensation can work for them. This is a two-fold issue. First to consider is whether the board understands the impact compensation has on retention and succession planning. While compensation and benefits are the largest component of operating expenses, compensation isn’t an issue until something happens to turn it into an issue. Someone retires. Someone resigns. Someone dies. Suddenly compensation and benefits are at the forefront and the board is reacting to the situation. Compensation is most effective when it’s proactive.

The second part of the issue is that directors may not understand how to connect compensation back to the strategic plan. Nearly 44 percent of respondents of the survey revealed that CEO compensation is not linked to a strategic plan. Our conversations with bankers indicate that there may be a misunderstanding from the board on how their compensation is tied into the goals in the strategic plan. Effective compensation plans are based on achieving goals and meeting key performance indicators. From the bankers’ standpoint, they understand the link, but may feel that directors and board members are removed from the connection. 

Putting Compensation Anxiety to Rest

Surveys always spark conversation. And the compensation survey reveals the need for more conversation between bank officers and their boards. Frank discussions on retention strategies and succession planning are needed to alleviate stress. While compensation planning isn’t as complicated as quantum physics, it does require a strong level of focus to resolve the concerns that keep us up at night. Discuss the issues with your board. Talk about solutions. Resolve them before they become real problems.

Devising a Plan and Determining What Questions to Ask


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

What do you mean by succession planning?

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

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

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

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

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

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

What is the role of the board in succession planning?

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

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

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

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

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

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

Preparing Your Virtual Bench


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

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

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

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

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

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

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

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

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

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