When CEOs hand boards a time bomb

Over the next few years, a wave of generational change already underway will accelerate in the nation’s community banks. This series will explore common mistakes made in management succession plans, and how they can be avoided. For links to earlier installments, see the list at the end of this one.—Editor

Last week, I began the story of two bank board members, both major shareholders, who worried about their bank’s lack of succession planning. Despite their anxiety, the board did not engage the then-63-year-old CEO about his plans—they failed to have “the conversation.”

During the next two years, the bank managed to overcome the death of its CFO, the failure of the two people promoted to replace him, and a series of financial blows resulting in major losses and unwanted regulator attention.

What happened next?

Finally the sun came out. The institution swallowed the bitter pill of selling nonperforming loans and potential problem loans. It hauled itself back from the brink of disaster and began to rebuild.

Just as it appeared that the bank was entering a new period of stability and consolidation, the CEO, now 65, told the board that he intended to retire in six months.

The news struck the board like a lightning bolt.

The board understood the governance principle that applied:

The board is responsible for ensuring that there is a succession plan in place.

But the CEO is responsible for getting it done.

What now?

With no plan in place and a soon-to-be departed CEO, the board had three options:

1. Beg. It could implore the CEO to stay longer to design and implement a comprehensive plan. Given the CEO’s announcement of a six-month window, it was unlikely that he would be interested in staying longer.

And even if he chose to accommodate the board, there wasn't enough runway to implement a plan.

2. Look for an internal successor. Absent proactive leadership development, it was unlikely that a potential successor could be prepared in time. In fairness to the internal talent pool though, the directors had a duty to consider these candidates.

3. Call 800-HEADHUNTER.

An external search would need to be mounted quickly.

Would the board calmly and deliberately have the time to identify a strong contender?

Or would it panic and look to a search firm to bring forth a corporate “savior”?

In his paradigm-shattering book, Searching for a Corporate Savior, Harvard Professor Rakesh Khurana writes:

“Whether a firm is performing well or poorly affects whether the board is more oriented toward rational or charismatic succession. When the firm is performing well and the organization's environments stable, boards will follow the traditional process of allowing the outgoing CEO to choose a successor. By contrast, when the firm's performance is poor, directors are more apt to look for a charismatic outsider to improve it.”

Such decisions are often improvisational in nature. Faced with a six-month time bomb and an unstable financial situation, the board may become overly reliant on the executive search firm to offer up a candidate with the social skills, presentation style, and, yes, charisma, to lead the organization to a better place.

In so doing, ordinary qualifications such as industry knowledge may be pushed into the background.

The eleventh-hour gamble

Sometimes the choices made are winners. However …

Corporate history is replete with failures that “looked so good in the interview” but disappointed in performance, e.g. “Chainsaw” Al Dunlap at Sunbeam, John Walter at AT&T, Carol Bartz at Yahoo.

There is no joy in this “I told you so” moment for those who insisted, when the time was ripe and ample, to have “the conversation” with the CEO.

Proactive succession planning is the only certain way to reduce the risk of poor decision-making under crisis.