WEEKLY ADVISER: Line of CEO Succession A Double-Edged Sword For Banking

I moderated a panel for bank directors recently at the Independent Community Bankers Association convention in San Francisco, and the topic that generated the most attention among chief executive officers was finding a successor.

"How many of you," I asked them, "have a written memo in the board minutes or another formal way of determining who will run the bank if something happens to your current CEO?"

There were some 400 people in the room, but only about 10 hands went up.

Why?

Many bank chief executives have a feeling of immortality about their role. They don't think they will be run over by a truck or suffer some disability. So why bother planning succession when they are only in their 40s, 50s, or even early 60s?

Others take the "after me, the deluge" approach. There are people in every field who balk at preparing for the next top manager.-thinking that if the next regime is unprepared, the prior administration will look better by comparison.

During the panel discussion, the question that concerned most participants was: "How do you pick one person to wait in the wings?"

In every case, there are drawbacks.

If you have several contenders and you anoint one, there is a good chance that the others will start looking elsewhere for career advancement, and your bank may lose talent.

And what about the person who is selected? Is his or her name now engraved in stone? What happens if the board changes its mind once the current CEO is gone? Certainly it has the right to pick someone else.

But is it fair to pass over, at the last minute, the person who was first picked? The designee might have turned down an attractive job elsewhere, having been promised the bank's top job.

Our panel pointed out that one reason many banks do not want a formal succession plan is that it comes too close to establishing a mandatory retirement age for the staff and the board. Bank consultants say that whenever they bring up the topic of mandatory retirement, they are told: "The board will not even consider it."

Our panel thought it wouldn't be right to set an age limit for board members while making exceptions for those still active in their primary work. Panelists thought such a policy would be unfair to those who work for large companies that have mandatory policies. Board members who run family companies can hold top titles as long as they want-even if someone else actually runs the business.

Other factors complicate the touchy retirement-age issue.

Bankers report that sons of older directors beg the CEO to keep their dads on the board because they love the meetings and have so few other interests. The CEOs contend that old-timers take up time talking about how they did it in their day and what's wrong with banking today.

We have seen many banks put up for sale because there was no plan for succession and the development of young blood had been a low priority.

What should your bank do? What should the retirement policy be? Should a successor CEO be formally named in advance?

Let us know. Send your ideas on resolving these issues.

As always, the writer of the best response will be named president for a day of Schmidlap National Bank, and he or she will receive a certificate to prove it. Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management.

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