Band Directors Briefing Band Directors Briefing

 
  cover.jpg
   






Does your board suffer from DBS  
 



 




FREE BOARD HELP:
Click for articles about corporate governance issues drawn from the Bank Directors Briefing "The Director’s Job" monthly feature and other sources



FREE SAMPLES:
Click for sample issues of the newsletter and a subscription form.



 

HAS YOUR BOARD TACKLED MANAGEMENT SUCCESSION YET

From the May 2002 Bank Directors Briefing. Copyright Simmons Boardman Publishing. For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com

 

Management succession planning is not unlike life insurance. While nobody likes to bring up either subject, they are both very handy to have in the event of the death of the CEO or breadwinner.

FIRST, A TRUE SUCCESS STORY

It had been a rough month. A string of large borrowers had trooped through the CEO’s office with tales of woe. The local real estate recession was pulling the borrowers down, and they were going to have trouble paying their loans.

One afternoon, the CEO, an older man, began to work through all the numbers. As the pieces fell into place, the total bad debt that the bank could face was staggering.

And his heart couldn’t take the strain.

The coronary didn’t kill him, but it put him out of commission. Fortunately, from his hospital bed, he was able to tell his second-in-command, and heir apparent, to gather the board and announce that the succession plan, which he had put in place the year before, had to be activated. It was, and while the bank had some hard days ahead of it, it survived, remains independent, and is now going strong.

But what if there hadn’t been an heir apparent–or at least no one clearly designated as such by at least a board resolution?

Have your board and management put their collective heads together to think about management succession?

Ensuring continuity of operating leadership is an essential duty of a bank board. Yet two out of three community banks don’t maintain a written succession plan, according to the latest Community Bank Competitiveness Survey.

The survey, conducted by ABA Banking Journal in cooperation with the ABA Community Bankers Council, found that it didn’t much matter how broadly or closely a bank is held–-only 31.7% of family-owned banks have a written succession plan, whereas only 36.8% of publicly traded community banks have written plans.

This is of concern because, overall, there has been a slight "graying" of the community bank executive corps since the annual survey last looked at the succession issue two years ago.

The survey found that 72.4% of community bank CEOs are over 50 years old and nearly 30% are over 60. (Of course, CEOs can die or otherwise leave at any age, but the older the banker, the higher the odds.)

"Many bank boards with over-50 CEOs are not prepared, at least with written plans, for the sudden demise of the bank’s top officer," the survey report states.

And in the recent Ninth Annual Survey of Community Bank Executives study by the Grant Thornton accounting firm, only 57% of the banks that responded stated that they feel that management succession planning is important to their institution’s continued success.

WHO SHOULD HANDLE SUCCESSION?

On a related note, the Professional Bank Services, Inc., 2001 Corporate Governance Survey found that not all boards take on the duty of making sure that management succession is planned for. Asking the question about planning somewhat differently, the PBS study found that only 41.7% have a formal succession plan.

In all, 43.7% of the respondents to the PBS study believe that the board should handle succession planning; 34.9% believe the CEO should handle this; 11% think a board-level committee should handle it; and 8.2% believe the chairman should handle succession.

A handful of institutions believed that key shareholders who are not directors nor the CEO should handle succession. On the other hand, 87.3% of the respondents said that their boards would likely approve the selection of the new CEO.

"This is a must," says George Freibert, chairman of the Louisville, Ky.-based consulting firm. "The CEO should be responsible to the board to ‘bring someone along’ in the bank to be the CEO successor. The board should know who it (or they) are, but should leave the process and selection to the CEO unless there are clear and obvious reasons to intervene. ... The board is responsible to know or to insist that it be done."

One example of the latter, Freibert says, is if the CEO is grooming someone the board strongly feels is unacceptable.

A REGULATORY REASON TO CARE

To underscore the importance of succession planning, consider the following excerpt from the December edition of the Kansas City Federal Reserve Bank’s Financial Industry Perspectives magazine. Fed economist Forest Myers writes that in that Fed district:

"...our examiners have noted a general aging of senior management at many of the banks they visit. The careers of these management officials spanned the banking troubles of the 1980s and the deregulation and good times of the 1990s. They successfully guided their banks through the turmoil of the last 20 years, and the loss of their experience would leave a significant management void if no plans were made for passing the baton to the next generation of bank managers. Yet, many times examiners found that management vacancies at community banks were not being filled in a timely manner or that small rural banks were finding it difficult to attract and retain staff for key positions. These circumstances raise supervisory concerns regarding bank management and management succession." [Emphasis added]
 

This website copyrighted 2002 by Simmons Boardman Publishing Corp. All rights reserved.