Community banks can’t afford to be without a succession plan. There’s no specific regulatory requirement that banks create a succession plan, but regulators generally view a formal plan as a best practice. The OCC, in its Spring 2014 Semiannual Risk Perspective, listed “planning for management succession and retention of key staff” as a key risk issue facing community banks.
Here are five tips for developing an effective succession plan. Although they focus on the CEO, it’s a good idea to also have plans in place for other key executives and directors.
1. Look inward first
Although banks often consider external candidates to succeed the CEO, naming an internal successor may offer significant benefits. Internal candidates are ensconced in the bank’s corporate culture, offering the advantage of continuity. When you bring in an outsider, there’s always a risk that he or she won’t blend into the culture. Plus, internal candidates are familiar with the bank’s operations and strategies and the current CEO’s agenda.
Another advantage is that your directors — at least in theory — already know internal candidates and are familiar with their work. To ensure that’s the case, invite candidates to present to the board and arrange other interactions between board members and potential successors.
2. Develop your talent
To increase your chances of promoting from within, have an active program for developing potential successors. Training, mentoring and executive coaching can help you evaluate the potential of internal candidates and develop the skills they need to succeed in the CEO role.
It’s also important to manage candidates’ expectations to avoid a mass exodus when one person is chosen as the successor. Rather than treating the process as a competition, characterize it as a developmental opportunity for all participants and have a plan for those who aren’t selected.
3. Be prepared to look outward
Despite the advantages of hiring from within, in some cases it may be necessary or desirable to consider external candidates. Perhaps you don’t have a suitable internal candidate. What if your current CEO dies or becomes disabled unexpectedly, and there’s no time to groom an internal successor? Or maybe you feel that your bank would benefit from bringing in “new blood.”
To prepare for such contingencies, it’s a good idea to track potential candidates at other banks or even in other industries, possibly with the help of a recruiting firm.
4. Start early
Planning should ideally begin two to five years before a potential succession event. This gives you time to define the qualifications you’re looking for, draft job descriptions, and evaluate internal and external candidates. It also gives you time to develop internal candidates and formulate a retention plan for those who aren’t selected.
5. Review your plan frequently
A succession plan isn’t a static document you can put on a shelf and forget until the time comes to put it into effect. It’s critical to revisit your plan periodically to ensure that it continues to meet your objectives. You may need to adjust your requirements, for example, in the event of changes in your bank’s strategies, regulatory environment or other circumstances.