As Baby Boomers approach retirement, that means boards must approach succession planning, but the dearth of next-generation talent is disrupting the natural order – and in some cases, it’s driving banks to consider merging as a means of survival.
“We call it the silver tsunami,” said Chip Goode, managing partner of Kiradjieff & Goode, an executive search firm headquartered in Wellesley. “We are getting calls on a weekly or monthly basis by boards of directors and CEOs on this very topic from a variety of financial services firms.”
Many of those C-suite executives who are eagerly anticipating retirement came up through the ranks of in-house training programs at regional giants like BankBoston and Fleet – programs from which their eventual successors did not benefit.
Not only have those fabled in-house training programs gone the way of the dodo bird, but in many cases, the executive vice presidents who thought they might succeed the CEO got compressed, said compensation advisor Arthur Warren. In other words, they got fed up and left for greener pastures and greater opportunities.
Succession planning has also taken on a new importance in recent years as regulators have emphasized it as a form of risk management. After all, even if your senior leadership is still years away from retirement, you probably still want a plan in case your number one or number two should meet the business end of a breakneck bus.
“Boards overall today are more educated and engaged about the importance of this topic than they were even five years ago. They are better informed, and by necessity, this has become a top-of-mind topic,” Goode said. “And it’s not just financial services. We have several other practice groups in real estate, health care, consumer and privately held companies that all have the same challenges.”
He said that some organizations’ boards have taken extra steps to identify and groom those heirs apparent much earlier in the process. Boards will often encourage high performers to get more involved both inside and outside the bank – for example, getting them onto the asset-liability committee and onto a few community organizations’ boards, too. And they’re engaging in the process sooner than they did in years past.
“They’re doing a better job of calling us earlier in the process than they did several years ago where they had an immediate need,” Goode said. “Now we’re more in a consultative role three to six months before they even go to the market. There’s plenty of time to be thoughtful about it.”
And when a board can’t identify a local successor who knows the market, he said, they are increasingly setting their sights beyond Massachusetts, considering qualified candidates from all over the Northeast and Mid-Atlantic region.
Merging To Survive
The issue of succession planning, and the dearth of emerging talent, also has some bearing on another discrete issue within banking: the M&A scene. It’s no coincidence that the graying of the industry is happening at the same time as a wave of mergers and acquisitions. Last year alone, the state Division of Banks approved 10 bank mergers.
“That is happening, there’s no question,” Warren said, adding that the credit union industry is consolidating for many of the same reasons as the banking industry.
Compliance costs, regulatory burden and margin pressures matter, too, but a community bank that’s dealing with those issues and their CEO’s impending retirement might find it more advantageous to seek a merger partner than search for a successor.
“If you looked at the reason for a number of mergers, it’s because the CEO of one institution is retiring and that institution looks out and sees another bank that has a younger CEO whom they have confidence in, and they’re maybe looking to grow through a merger anyway,” said Kenneth F. Ehrlich, a banking lawyer and partner at Nutter McClennen & Fish. “There are a number of banks that have solved their management succession issue through a merger.”
And Matthew S. Sosik, president and CEO of Easthampton Savings Bank, said that that can alleviate at least one of the so-called “social issues” that two merging banks will inevitably have to finesse.
“When one of the CEOs of two banks discussing a merger is near retirement, it takes one of the stickiest and most difficult issues off the table and allows the boards to focus on answering the other questions,” he said. “Simply put, when CEOs don’t have to worry about self preservation, they will be much more likely to structure a deal that works for both sides.”
But Sosik also worries that the community banking industry isn’t doing enough to bring even younger talent into the fold.
He said, “As an industry, I think we have to find innovative ways to attract younger talent into this industry so that we can have the next set of bankers ready to take the reins when the time comes.”
