Publications & Resources

June/July 2007
Focus: Leadership

Successful Succession Planning

By Philip K. Smith

Over the past several years, the key buzzwords for financial institutions have included “succession planning”. Most boards of directors now fully recognize the need to have some element of succession planning as a mechanism of promoting stockholder value or at least as a way to promote proper corporate governance. However, successful succession planning is more than a corporate organizational chart and is more than just succession planning for the CEO.

The key to ensuring successful management succession is to engage in the planning process formally rather than on an ad hoc basis. Boards of directors should strive to make succession planning a key topic at a specialized board meeting or at yearly strategic planning retreats. Both short-term and long-term planning needs ought to be addressed. The board of directors should know who will handle day-to-day affairs if the president does not show up in the morning. Additionally, there needs to be longer term planning for when the president retires. While there does not need to be detailed succession planning for every position in the organization, there ought to be specific succession planning at least for the CEO, the senior lender, the COO or CFO. If there aren’t individuals in the organization currently being groomed for those positions, the board at least needs to be made aware that, in the event the individuals need to be replaced, the institution will need to look outside its own employees to fill those positions.

I often find, too, that the board or senior management may be hesitant about advising younger officers of the desire to groom them for upward mobility. That is a mistake. If the board or senior management has young and talented officers who exhibit leadership characteristics, good communication skills and a willingness to be a long-term player at the organization, management should advise them that those characteristics are valued and begin letting them know they are being groomed for upward management positions.

Another key element to successful succession planning is the need for director succession planning. Often in strategic planning retreats I facilitate, the board is surprised by the idea of director succession. A typical community bank director serves in his position for life. Historically, there have been few director succession techniques other than mandatory retirement. As a rule, I do not favor mandatory retirement because I do not think there is a magical age at which dementia sets in or when a director is no longer helpful. Some of the best directors I have seen have been in their 80s. Some of the worst I have seen have been in their early 40s. The key, though, is to be honest with yourself. If your board is not able to approach another director and advise them that their services are no longer needed or valued or that the individual is experiencing health problems that prevent the director from being effective, then mandatory retirement is a good idea. If you honestly think your board has no problem telling the chairman of the board, who may be a large stockholder, that the institution would be better served with another individual, then mandatory retirement is not needed.

But, just like planning for management succession, it is a good idea to have succession in place for your directorship before it is needed. That may require using an advisory board as a training ground for new directors or bringing in younger or different directors perhaps three or four years before another director retires so that there can be an appropriate transition period. Also, if older directors or more senior individuals need to be replaced, consider developing a director emeritus status. Some of the worst decisions I have seen have been to take a director, even if he or she is in failing health, and simply ask them to leave the board with nothing further. The years of dedication and service they have provided and their experiences should continue to be valued. With director emeritus status, the individual is still invited to participate in all board meetings, may be paid some percentage of his original board fee and his input is valued and requested at meetings. The only difference is that he simply does not vote as an official member of the board. That is often a good transition to help more senior board members accept the succession that is needed for their position.

The key for both management and board succession is to plan and do it on a formal basis rather than assuming the issues will not occur. Whether it is a formal strategic planning retreat or simply management outlining succession plans and presenting them to the board, successful succession planning will help promote a profitable organization.

Philip Smith is a principal in Gerrish McCreary Smith Consultants, LLC and a member of the board of directors of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He may be reached at (901) 797-0900.

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