Management Succession Planning: How to Do it Right

By Tim McTaggart and Ernie Panasci

This article originally ran in the January/February 2018 issue of Western Banker magazine.

The regulators will be supportive of bank boards that work with their internal HR departments and with outside consultants, including counsel, to develop a three to five-year management succession plan that is a “rolling” evergreen document updated annually until there is a known event of a CEO resignation or retirement. Then, the bank’s succession plan needs to spring into action and be communicated to the bank’s regulators, employees, customers, and community. To be ready, the bank needs to take the long view to support executive development over the course of the careers of its personnel, nurture and reward its star performers and look to fill in gaps in the management ranks from external hires where additional depth is needed. This effort of identifying management talent as part of a management succession plan (inclusive of senior officers and IT Senior Management) is a different exercise from planning for business continuity in the event of an operational/organizational emergency, including if there is an emergency due to the untimely departure or passing of a CEO.1

From our respective vantage points as a former state bank regulator encouraging management succession planning and as a private law bank merger and acquisition specialist who has seen the lack of a CEO successor often drive bank sales or mergers, we offer the following observations:

The bank needs to develop a deep bench of management talent and continue to look to expand the pool of potential candidates who can be promoted into senior management positions. The FDIC issued a Financial Institution Letter on January 5, 2017 which summarized the agency’s 2016 community banking conference including how community banks are managing succession planning.2 In the FDIC’s April 6, 2016 conference summary report, ideas were presented to show how to develop a next generation of bank leaders.3 Among the strategies discussed were: “formal internship and mentoring programs, rotating emerging leaders through 90-day assignments with executives, charting specific career paths to executive positions, and including emerging leaders in board meetings so they become comfortable participating in the discussions and making presentations.”4 We agree with these ideas, although we would recommend that banks rotate strong management performers in longer than 90-day assignments with a longer period of perhaps six to nine months to provide greater depth as part of the management development process. It is critical for upcoming management to be involved in the loan business and understand the lending margin mechanism thoroughly as well as to work in other areas of the bank which emphasize fee income generation, operational risk/compliance matters and marketing.

Once a plan is developed for succession and the incumbent CEO has set a target retirement/ resignation time frame, then the Board should stick to the plan. Additional flexibility may be needed in terms of implementing a plan, but a bank needs to resist the temptation of keeping the incumbent CEO on longer than he/she wants to be in place because the Board is concerned about macroeconomic conditions, or operational challenges and risks in the marketplace. The Board needs to trust in its pool of management talent. Likewise, the Board needs to resist the temptation to permit an incumbent CEO to stay on longer because for example, the stock market has underperformed right before the targeted retirement date or for other personal reasons motivating the incumbent CEO to not want to make a “clean break” as planned. If the management succession plan has been developed carefully and the target exit date for the incumbent CEO has been thoughtfully considered and communicated clearly to customers and the community, then there is little to be gained by further delay of not moving ahead with the planned management succession. Indeed, if there is undue delay, there is a risk that the rising management stars may be recruited away to another position by a competitor.

Be open to a range of personality types and a range of diversity characteristics of individuals and build a team based upon different strengths. The bank’s organizational message needs to be that hard work and good judgment will set a candidate apart and permit he or she to rise up through the management ranks. That means that existing management does not need to clone itself. Various personality types can be very successful as CEOs. Introverts can be very strong leaders and extroverts can be primarily externally facing but sufficiently strong on internal details as well to do a great job. Balancing different personality types, skill sets and a range of diverse experiences can bring forward a great team. The bank’s board ultimately needs to think of its management as part of an overall team structure; in some instances, for example, there may be a very fine management contributor who is destined to be a “No. 2” executive and to strongly support the CEO. If a “No. 2” executive is truly capable of holding a CEO position, most likely, the person will be recruited away. From our vantage point, the sooner that the successor to the incumbent CEO is identified as part of the bank’s management succession plan and given the signal of the confidence that the Board and the CEO has in that individual, even if not publicly announced, the smoother will be the ultimate management succession. That may require additional patience from others in the existing management team who may still have the opportunity to be groomed for the CEO role or other senior positions at the time of the next round of management succession.

Life happens. Plans can unravel due to unexpected health issues or other unanticipated events leading to the departure of an heir apparent. Boards need to consider whether to look for an external hire, if that is possible in their marketplace or to do a “reset” and focus on grooming another internal candidate for succession as CEO, along with other planned senior management team advancements.

When management succession is done well, a bank will have the right CEO before the management change as well as after the management change. The new CEO will bring new ideas and a different perspective on some issues from his or her predecessor but ultimately a bank’s board wants to strive for the continuation of a bank’s culture as the new CEO gets started and makes his or her mark in the community, with investors, with employees, with customers and, with the regulatory officials. The new CEO will confront unique challenges but will be established as an effective decision maker to provide direction and leadership by the time he or she is ready to take over as CEO. And, then the Board needs to get started again strategically planning, likely with the objective advice of outside counsel, to develop the preliminary steps for the management succession plan for the future. The banking regulators are particularly aware of the challenges that rural banks may encounter to attract and retain senior management talent. So, for those banks, management recruitment/succession always needs to be on the minds of the directors of those banks. Without a doubt, having the right CEO is the most important factor for the long-term success of a bank.

1.  FFIEC INFORMATION TECHNOLOGY EXAMINATION HANDBOOK: MANAGEMENT, at 19, 46 (Nov. 2015). Federal banking regulators provide that an effective oversight
of management should include succession planning for key personnel. See, e.g., OFFICE OF THE COMPTROLLER OF THE CURRENCY, COMPTROLLER’S HANDBOOKS:
SCOPE, ON-SITE EXAMINATION FOR SAFETY AND SOUNDNESS, SR 94-12 (Feb. 24, 1994). See also 12 C.F.R. § Pt. 30, App. D (heightened standards for certain large
insured national banks, insured federal savings association and insured federal branches).

(Jan. 5, 2017).

(April 6, 2016).

4.  Id. at 7.

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