The article below originally ran in the July/August 2013 edition of The Texas Independent Banker Magazine.
Succession Planning – A First-hand Account
I was the Senior Vice President of Operations for a $140 million Texas community bank when I received a call on November 6, 2002 informing me that not an hour earlier our bank’s Chief Financial Officer, and my close friend, had been killed in a car accident while on a hunting vacation in Montana. I walked into the bank President’s office, interrupting a meeting he was having, and said “We have to talk now.”
Like so many community banks, we did not have a formal succession plan. We had given succession planning some thought, but it was always something that seemed to remain on our “to do” list. That phone call on November 6 changed all that and started a mind-numbing scrabble of long days and even longer nights that could have been much easier to deal with had we had a succession plan in place.
The bank President, board members, and other senior bank officers represent the leadership of the bank. If that leadership becomes compromised or degraded, the bank certainly faces considerable “leadership risk.” In fact, the loss of a senior officer or board member can have a profound impact on both the short-term efficiency and the long-term strategic success of the bank. Like any other risk, boards have a fiduciary responsibility to develop a comprehensive and carefully crafted plan to address “leadership risk” – and that translates into a succession plan.
No matter how big or small the bank is, the board of directors should have developed a succession plan. The complexity of the plan will certainly be impacted by the size of the bank, but there are some basics that every board should consider when developing a succession plan. Without a plan, boards will find it difficult to act quickly and efficiently when faced with the inevitable loss of a key member of bank leadership.
Step #1 – Assign Responsibility for the Plan
The entire board can and should take an active role in the succession planning process giving both advice and consent. However, the details and actual development can be assigned to a sub-committee of the board or even to the senior management of the bank. There are also a variety of third party human resource consultants who can provide valuable guidance in the development of an effective plan and they should not be overlooked in the process. The board should also approve and adopt any plan, and part of the responsibility assigned should include a regular annual review and report to the entire board. A good succession plan is dynamic.
Step #2 – Identify Covered Individuals
A succession plan should cover all those who play a significant and critical role in the bank. This obviously includes the president, the chief financial officer, a chief operations officer, a chief credit officer, the chairman of the board, and in today’s technology driven world the information and technology officer should be included as well. Those are just a few titles that come to mind, but each bank will have to consider and possibly include other department or division heads who are critical to the success of the bank and whose loss would pose a significant detrimental impact.
Step #3 – Identify “Springing Events”
What event will cause the succession plan to spring into action? Typically plans should address three events that would cause the activation of the plan for covered individuals – their sudden death or incapacity (the “hit by a bus” scenario); a planned retirement or departure; and also a significant or sustained deterioration in performance. However, one other event should at least be given some thought and that is a significant change in the strategic plan of the bank because that could necessitate a change in leadership or require a slightly different skill set to carry out the strategic goals of the bank.
Step #4 – Identify Potential Candidates
This step is the replacement planning part of the process and should include a means for identifying and developing inside talent. I worked for a larger community bank that required each of their senior officers to both identify and develop their successors in a formalized process. That internal focus recognizes the fact that for a variety of reasons internal talent may be better suited to and able to step into the role better than outside talent. The board and senior management will have had time to interact with promising up and coming talent. Inside talent will also be familiar with the roles and responsibilities, and the corporate culture within the bank.
Step #5 – Reduce the Plan to Writing
Although we had discussed succession planning informally, all those discussions and plans went out the window when we were actually confronted with the sudden and tragic loss of a key member of our management team. There is simply no way to have a succession plan that is clear, consistent, and performs under the “stress of the moment” unless it is in writing and available to all the players involved.
Step #6 – Include the Board
As I already stated, board members are an integral part of the leadership of the bank. It makes sense that a succession plan will include the identification of potential board candidates. These can be individuals who serve on an advisory board or have professional skills desirable to the board. Identifying the right potential board candidate requires careful consideration and planning. For example, if a board had a single member with a strong accounting background, that should be a consideration when contemplating potential board members.
In conclusion, thoughtful consideration for the six steps above will help a board and senior management engage in the important process of succession planning. Loss is inevitable and often occurs at what seems like the worst time possible, but failure to plan is a conscientious decision and reflects an abdication of a board’s fiduciary responsibility.
Finally, here is to Charlie. I think about him often and while we managed without him, in many ways he was irreplaceable.
Kelly Goulart is IBAT’s Regulatory Compliance Manager.