Avoid “awkward conversation,” you'll risk succession crisis

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.

In banks truly governed by a board, directors need to take the lead in ensuring that the CEO is actively managing a succession plan. Here’s what can happen when they don’t.

Recognizing threat and acting aren’t same thing

Some two years ago, the chairman, along with a fellow director of a publicly traded bank, asked me to assess the risks facing the bank’s executive team. The bank’s CEO, then 63, and several other members of the C-suite were edging closer to retirement age.

The two board members were deeply concerned—and they had cause to be.

They faced the unavoidable reality that within two to five years there would be virtually 100% turnover on the senior team. The directors wondered out loud whether they had the right players in the wings to take over and what should be done to develop potential replacements for new roles.

We agreed on the objectives of a robust succession planning program:

• To ensure continuity of leadership in critical positions.

• To retain and develop intellectual capital to support future growth.

• To encourage and motivate high-potential employees to aspire to advancement.

Best practice suggests that the plan starts with the CEO’s role and systematically works down through each layer of management. In larger organizations, it is also possible to focus on a vertical slice working from the head of that area down. However, in organizations the size of most community banks, the CEO is the obvious starting point.

At a community bank, especially, having the internal talent to promote is a clear competitive advantage. As another bank president observed, “It’s easy to train outside hires in our systems and policies. But there’s no shortcut to building customer relationships. And don’t get me started on culture!”

Missing ingredient: “The Conversation”

For my client bank’s board members, succession appeared now to be a matter of working out the specifics. The board members were keen to proceed—except for one very critical detail.

They had yet to engage in a frank discussion with the CEO about his plans. In reality, what was needed was more than a discussion.

The board needed the CEO to develop and share his own timeline.

In a public company, the CEO is the only employee of the board. It stands to reason then that the single most important responsibility of the board is the selection of the next CEO.

These board members clearly understood that. But for their own reasons they were not comfortable broaching the subject with their employee.

As often happens in awkward situations, procrastination tempts fate.

Board gets blindsided—and still fails in key task

Quite unexpectedly, a key member of the senior team, the CFO, died in office.

This officer’s death triggered eleventh hour decisions to hastily promote two internal candidates to divide up his job. But little had been done to prepare these candidates for greater responsibility.

Within a few months it became apparent that they would be unable to perform at the level expected. The CEO mounted a frantic external search to plug a mission-critical gap.

Just as things looked like they might return to normal, I was invited back to assess the current situation and suggest ways of accelerating the development of internal talent.

But as before, the necessary precondition, the awkward conversation with the CEO, still had not taken place.

While the organizational instability continued, quarterly profits dived from a few hundred thousand to seven digit losses.

The stock dropped to a record low and stayed there.

Fighting fires always trumps proactive planning.

To be continued next week…