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4 issues you can’t duck anymore

Board and management should be talking about these

4 issues you can’t duck anymore

I have been facilitating long-term strategic planning sessions for community banks for over 25 years. In fact, through our consulting firm, we facilitate approximately 100 planning sessions for community banks annually.

Reflecting on the planning sessions I have facilitated over the years, it occurred to me that there are several items involving very difficult discussions that every community bank board really needs to talk about. These include the following:

1. Is now the time to sell the bank?

2. Does older ownership need share liquidity?

3. How do you get some of the older board members off the board? 

4. Who is going to be the next CEO?

1. Is now the time to sell the bank?

As a preface to this discussion, please be advised that I am a staunch supporter of independent community banks. However, to kick-start every planning session, once the board gets through the preliminaries, the board should discuss whether now is the time to proactively sell.

This is not a question of whether the bank and its holding company would sell for some price if someone dumped a large bucket of gold Krugerrands on the boardroom table. It is really a question of whether the board should be proactive in looking for a sale now.

Historically, most boards’ positions in the community bank space were fairly adamant that “Our bank is independent for the long term.” Unfortunately, under today’s conditions the board cannot simply take the position that “We are going to stay independent forever no matter what.”  The best the board can do is indicate the bank will remain independent subject to the receipt of an unsolicited offer.

On the other side of the spectrum, the board may decide now is the time to sell. From a long-term planning perspective, if the board’s plan is to sell the bank in some reasonably short period of time (a couple of years), then the plan will be totally different than if they have a long-term viewpoint.

2. Does older ownership need share liquidity?

Nestled nicely in the first issue of remaining independent is the need for share liquidity for the older shareholders.

Often in a long-term planning session, at least one member of the board will fully respond that while it is not time to sell the bank, he or she does need to liquidate his or her own holdings.

In other words, “Do not sell the bank—but I need to sell my stock.” 

It is critical to get those issues identified so the holding company can determine how much excess capital it needs to keep as “dry powder” or assess its leveraging ability in order to buy out these older shareholders who will need liquidity before the stock hits their estates.

Unfortunately, the board often gets into the prediction game of when a particular older shareholder may pass to the Great Beyond, leaving their shares available for purchase by the likely purchaser, the holding company.

At best, this is guesswork. It is much better to proactively address the issue to ensure the bank and holding company have adequate capital available.

3. How do you get some of the older board members off the board?

One of the more difficult discussions that needs to be had at every planning session is board of director succession.

This is not an attempt to run off the older directors—or at least not necessarily.

As I have indicated previously, many banks have mandatory retirement for their board. I am not a big fan of mandatory retirement because, in my experience with mandatory retirement, the bank often loses a well-qualified older director just because that director “ages out.” 

The board also, unfortunately, locks in some of the younger directors who may not be as capable as one would like.

A much better assessment of how to provide for board succession is board evaluations.

Or, frankly, simply a chairman who is willing to do his or her job—the tough task of telling a board member “It is time for you not to stand for reelection.”

These discussions are what the boards need to have if the bank is going to perpetuate its existence.

4. Who is going to be the next CEO?

Equally as difficult as board succession for many boards is selecting the next CEO. My experience has been that uniformly the board that is looking for a new CEO wants someone exactly like the last CEO.

Unfortunately, there is no such thing. Human cloning, as far as I know, is still not being done, at least not frequently.

What the board really needs to do is determine whether there are internal candidates and whether there are external candidates, and then decide what type of search they are going to conduct for the next CEO.

The bank may have an internal candidate who has been groomed by the current CEO. In that case, it is pretty much a no-brainer by the board that person will become the next CEO.

If there is no internal candidate or multiple internal candidates, then the board needs to decide how it is going to conduct the search; the process it will go through; and the timetable for decision making.

The board must also determine how much “overlap” between the former CEO and the new CEO needs to occur. Often, a few to six months is appropriate, though that can sometimes be too much if the old CEO is interfering with the new CEO. (The phrase “from my cold, dead hands” comes to mind.)

These are simply four of the key issues that every board needs to address in strategic planning, even though the discussions may be difficult.

I will address other “touchy” issues in another blog. If you like, in the comment section below, share what you see as the top issues for community banks and their boards.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish Smith Tuck Consultants, LLC, and a member of the Memphis-based law firm of Gerrish Smith Tuck, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.

In mid-2016 Gerrish's blog received a national bronze excellence award from the American Society of Business Publication Editors. This followed his receipt of the regional silver excellence award for the Northeastern Region from the same group.

Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish Smith Tuck has assisted over 2,000 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at [email protected]

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