One of the least-appreciated threats to the survival of any community bank is failure by the board to plan for management succession. Executives retire or move on to greener pastures. If a community bank is not prepared to replace its leaders, it can quickly lose direction, focus and – ultimately – its independent existence.
A well-conceived plan will almost always be more effective than a haphazard reaction to a succession emergency. The bank whose board had made no effort to ensure leadership continuity by identifying and developing leadership talent assumes a much higher degree of risk for its continued viability. Management continuity is best addressed through the careful succession, retention and development of key personnel.
The current reality is that one-third of all community banks either have no succession plan or only a very rudimentary emergency suc-cession plan in which leadership is transitioned by default in an emergency to the next ranking officer in the bank. Most boards simply do not devote enough time addressing succession planning issues. Here is a simple test. When was the last time your board considered: the talents and skills your CEO must have; how those requisite talents are likely to evolve in the future; what the board and your CEO are doing to develop the other officers; the capabilities of your senior management team; and whether your bank needs to look internally or externally for its next CEO? If your board has not had serious discussions about these issues on an annual basis, it needs to devote much more attention to succession planning.
Succession planning is a regularly scheduled agenda item at well-run public companies for one very pragmatic reason – at any point in time between 30 percent to 40 percent of their senior executives are “at risk” to retire (i.e., not likely to be in their current position in five years). Sometimes those retirements are planned (i.e., attaining normal retirement age), but in many other cases, they are not (i.e., death, disability, voluntary resignation or involuntary termination). Additionally, a competitor’s succession planning issue could become yours if that competitor poaches your CEO as the solution to its succession planning crisis. For this reason, a community bank not only needs to have a plan for management succession, it also needs an effective retention plan. Hold on tightly to the talent you have, develop and improve the talent you need for the future, and plan for the expected and unexpected.
Management Model
One source of confusion about succession planning is understanding what it is – and what it is not. To the uninitiated, succession planning means replacement planning. It is succession planning in its most basic form and is used to limit the chance of catastrophe stemming from the immediate and unplanned loss of the CEO. It is often utilized when an organization is in crisis mode.
At the opposite end of the succession planning spectrum from replacement planning is succession planning and development. Under this approach, succession planning is viewed much more formally and as part of an enterprise-wide process involving both the board and senior management on a regular and continuous basis. The goal of succession planning and development is to systematically identify, assess and improve the talents and skills of existing employees to contribute to the organization’s strategic goals.
Large, high-performing, public companies excel at the succession planning and development model. They seldom recruit senior ex-ecutives externally. An organization cannot, however, implement a succession planning and development approach to succession plan-ning overnight. It takes time, commitment, resources and scale to successfully implement a meaningful development program within an organization.
The third model for succession planning is management succession planning. This is a hybrid, pragmatic approach to succession planning that recognizes smaller organizations typically have neither the resources nor the manpower to always develop successors in-ternally but need a succession planning program that is more than a simple replacement plan.
Management succession planning focuses on succession planning for those key positions that are critically important for the bank’s strategic or operational success. This typically means the CEO and those senior officers with the expertise and talent to provide leader-ship and strategic direction, perform critical functions and make important decisions. Their loss could seriously disrupt the bank’s opera-tions or put it at risk.
In community banks, effective succession planning is achieved most practically by using a management succession planning model. Management succession planning is proactive and gets the board involved with one of its most important strategic functions, which is assuring that the bank has leadership continuity in the future. Replacement planning is passive and much more likely to produce haphaz-ard results. While the succession planning and development model with its focus on the development of personnel generally is most de-sirable, community banks with less than several hundred employees simply do not have the resources or the scale to engage in devel-opment and succession planning across the entire organization.
While succession planning is generally recognized as an important aspect of sound governance, retention of key personnel rarely gets the attention it deserves. If a bank engages in the comprehensive development of its key personnel, how can it prevent competitors from poaching the talent that the bank has dedicated considerable time and money to developing? Moreover, large regional banks previously developed and trained many qualified executives who ultimately migrated to community banks. This is no longer true. The talent pool available to run community banks is not as vast as it used to be. A community bank that does not have a retention plan in place to keep its top talent is taking considerable risk.
Community bank boards should also consider employment agreements with reasonable noncompetition covenants.
Stanley V. Ragalevsky is a partner and Sean P. Mahoney is an associate in the Boston office of the law firm of Kirkpatrick & Lock-hart LLP.
