Boards of Directors have a difficult, but critically important job to do with CEO succession planning. If a Board selects the right person to succeed a departing CEO, shareholders, employees and regulators will be happy with the results. On the other hand, a failure with CEO succession can bring about the failure of the enterprise. If it is not THE most important thing a Board does, it is very close.
I am often asked whether a retiring CEO should be on the Search Committee. There are times when the answer is an obvious “no.” However, there are situations wherein the Board feels more comfortable with their role if they have a long-term, successful CEO heavily involved in the process. My 35 years of participation in these processes has taught me that no two companies are exactly alike, so there is no right or wrong answer to the question. To me the ideal is for both the CEO and the Board to have important, but different well-defined roles in the process.
The most productive role for a CEO in succession planning starts the day they become CEO. From the beginning, a CEO should start preparing their potential internal successors by assessing strengths and weaknesses, getting them training, development and coaching as needed while exposing them to the Board. The CEO should be sure the Board understands the efforts being made to develop successors internally and frequently share candid assessments with the Board. If this work is done properly, the Board should have a good idea of their “bench strength” in case of an emergency and when it is time for the CEO to retire.
CEO and Board work together until decision time
The role of the Board (usually with the help of a Search Committee) is to select the best candidate from inside or outside the company. If the departing CEO has done his/her job, the internal candidates should be strong contenders, given their intimate knowledge of the company and its culture. Nonetheless, today, most Boards feel like it is their fiduciary duty to look outside the company as well as inside. So, most often the Board or Committee will have some good internal and external choices. When it comes time to make a choice, a long-term, successful CEO should be available to the Board, but should take a passive role except in extenuating circumstances.
The departing CEO will justifiably favor the internal candidates, and any external candidates the CEO brought in early. However, the departing CEO is most often not going to have to live with the consequences of the selection. The CEO can still be on-call with the Board to answer technical questions about the job, but the sorting and grading of the candidates should not include the CEO unless there are strong reasons to include him or her. Sometimes, the Board will choose a successor a year or two before the departing CEO steps down, in order to give the new CEO time to learn from the departing CEO. In other situations, the departing CEO will be staying on in a Board role, which has its own issues that we will discuss in a future blog.
For now, suffice it to say that including a CEO in the final selection of their successor is fraught with issues and should be avoided unless there are compelling reasons to keep them involved to that extent. If it would help your Board to have a full discussion about this issue, call me at 919-732-2716, or click here and give me your contact information.
It is never too soon to start developing a succession plan for the top executive positions in an organization. Such plans take time to develop and come to fruition. Here is a brief outline of the steps:
This step should be in process continuously. It involves determining which positions need successors and what knowledge, skills and abilities will be needed for those positions in the future to have a successful enterprise.
Development, when affordable, should start early.
This, too, is ongoing. It is the training and development of the inside candidates and the search for and recruitment of outside candidates that fit the ideal candidate profiles. This step takes time to implement…maybe years if you hope to develop talent internally.
Here you are screening, selecting and negotiating terms with the successor. Often, you will need to circle back and revisit plans and development steps if strategies change. Eventually, though, a successor must be chosen.
This is the handing off of the baton from a retiring executive to his or her successor. It is fraught with risk and should be carefully planned and
monitored. Most new employment relationships that are going to go bad will do so during the first six months while a transition is occurring.
There is a lot to do to make succession planning work. We will be happy to present an overview of the process to your executive team and/or Board at no cost
The Community Bank CEO of the future may be hard to find
Today’s “American Banker” had an editorial called “Chief Factor in Small-Bank Survival? It’s the Chief.” No question about it! Leadership matters and while the banking industry has always been about people, the quality of the leadership has never been as critical.
The model for success in the future for community banks is changing radically. Margins will be thinner on the traditional business of gathering funds and lending them out. Costs for doing business are rising, if for no other reason than increasing regulation. Customers are shifting banking habits requiring banks to invest more in technology-based solutions. The challenges to success will be sizable. So, what does the ideal candidate profile for the future community bank CEO look like?
I am sure we don’t yet have all of the answers to this major question, but many of the features can be seen in other industries that have gone through massive change. Retail distribution went through similar change over a couple of decades leading to the development of big-box and chain retailers taking the place of the local hardware store and clothier. Some leaders saw the change coming and innovated. Some changed the channel of distribution. Some narrowed the definition of their niche. In every case, survival depended on strategic vision, detailed knowledge of their communities and customers and the leadership abilities to take their people through the wrenching change without destroying their loyalty.
The ideal community bank CEO of the future will need to have a wide array of skills and abilities. They will need a mix of technical skills and interpersonal abilities that may be difficult to find. Technical skills to recognize and analyze risk and understand the opportunities and the limitations of technology will be key. In addition, the leadership traits of visionary strategists and change agents will be essential. The CEO of the future will also need to be able to drive a sales culture and hold people accountable for results. They will need to be a community leader and a master politician to help the local community understand why he or she demands performance and is willing to turn over staff members that may be their neighbors.
We build “Ideal Candidate Profiles” for Boards who ask us to find executives, and while every organization has its unique needs, there are certain traits that are usually needed based on the executive position. We are exploring the changes needed for the future and the community bank CEO profile is one that will change dramatically. Click the button below and register for a free presentation to your Board about the CEO of the future, or call 919-644-6962 and ask for Tim.
According to a recent WorldatWork survey of large companies, over 30% have no succession plans in place and 50% of executives say they do not have a successor for their current role. Why? They cited a number of reasons:
Not enough opportunities for employees to learn beyond their own roles (39%)
Process isn’t formalized (38%)
Not enough investment in training and development (33%)
Not actively involving employees or seeking their input (31%)
It only focuses on top executives (29%).
A lack of succession planning can lead to a lack of strategic direction and weakened financial performance, but it is hard work and Boards tend to make it a task instead of a strategy. We will be happy to share an outline of succession planning as a strategy. Just go here and request it: http://matthewsyoung.com/contact.htm
The three envelopes for succession planning
Or, you could use the three envelope approach. I learned this approach from a fellow who had just been hired as the new CEO of a large, publicly held company. The CEO who was stepping down met with him privately and presented him with three numbered envelopes. “Open these if you run up against a problem you don’t think you can solve,” he said.
Well, things went along pretty smoothly, but six months later, the net interest margin took a downturn and he was really catching a lot of heat. About at his wits’ end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, “Blame your predecessor.” The new CEO called a press conference and tactfully laid the blame at the feet of the previous CEO. Satisfied with his comments, the press – and Wall Street – responded positively, the stock price began to pick up and the problem was soon behind him.
About a year later, the company was again experiencing a slight dip in margins, combined with serious balance sheet problems. Having learned from his previous experience, the CEO quickly opened the second envelope. The message read, “Reorganize.” This he did, and the stock price quickly rebounded.
After several consecutive profitable quarters, the company once again fell on difficult times. The CEO went to his office, closed the door and opened the third envelope. The message said, “Prepare three envelopes……….”
With the “Boomers” reaching retirement age, executives are beginning to retire in large numbers, but will the new CEOs walk into empty Boardrooms? Let’s face it, becoming a Board Member is not as glorious as it once was. The liability one takes on in the current litigious environment and the work necessary to do the job well is rarely offset by the rewards, financial or otherwise.
We worry about attracting and retaining qualified directors to represent shareholder interests in the future. Recruiting and grooming future directors needs to be an ongoing process of a Nominating Committee. We have been on the lookout for practical solutions to this dilemma, and recently found a case study in the “ABA Banking Journal.” A number of years ago, First United eliminated its three Advisory Boards. In their place, an Advisory Council was created. Care was used in terming it a “council” and not a “board.” This made it clear that the role was advisory, and it did not bear the legal responsibilities of the Board.
According to William Grant, chairman and CEO, the Council meets six times per year, in a dinner meeting following our Board meetings. This affords our Board members the opportunity of attending and observing. The Council’s agenda is to kept abreast of the bank’s activities, and to solicit their input on a number of market‐related issues. The majority of the Council members are community oriented businesspeople, and able to bring this perspective to the meeting.
This arrangement provides the following advantages to the Bank:
It serves as a valued “blue sky” advisory group to help the bank establish and execute strategies
It provides a “farm system” for future directors by affording members the opportunity of learning about the bank, its mission, and its culture. The bank gets to know them. If there is a fit, then that person may eventually become a director. In fact, the last several directors at First United have come to the board by this route. If there is not a fit, then that becomes known before a member is placed on the board, and one side or the other comes to this realization.
It facilitates an environment where the Council member and various directors come to know each other, making the selection and nomination of future directors an easier chore.
This approach seems to address the issue nicely. We would love to hear other ways that have worked for you. Please comment below. Thank you. To discuss your Board’s succession planning process, call me at 919-644-6962 or complete a contact request at http://matthewsyoung.com/contact.htm.