How These Banks Aim to Sidestep Common Succession Pitfalls

Mercantile Bank in Grand Rapids, Mich., makes passing the baton look easy.

The $2.9 billion-asset Mercantile announced last month that Michael Price will retire as president and chief executive at yearend, paving the way for Robert Kaminski, the company's chief operating officer, to take the helm.

The CEO switch will be just the second in the bank's 18-year history and the first in nearly a decade.

A similar change will occur at Dime Community Bancshares in Brooklyn, N.Y., where Vincent Palagiano, who has run the $5.6 billion-asset thrift since 1989, will retire and hand the reins over to Kenneth Mahon in December. In San Antonio, Dick Evans at Cullen/Frost Bankers was succeeded as chairman and CEO in March by Phillip Green.

Each transition is anchored in a belief that success hinges on turning day-to-day operations over to a trusted lieutenant with years of experience at the institution they have been tasked with running. Green and Mahon have been at their banks since 1980. Kaminski, who helped found Mercantile in 1997, has worked with Price for more than three decades.

"Succession planning isn't something that happens overnight," said Jim Edrington, executive vice president of the American Bankers Association's Professional Development Group. "It needs to be a long-term process."

Mercantile is a good example, Edrington said. "The fact that they've done this two times in 20 years tells me they have a bench and they're continually evaluating talent," he added.

Succession planning isn't easy, and banks often botch the job, industry observers said.

Along with capital and liquidity, succession planning ranks as one of the "big three" issues that spur bank mergers, said John Donnelly, managing partner at consulting firm Donnelly Penman & Partners. "One or more of those [factors] rears its ugly head in nearly every deal," he said.

"Too many banks are not dealing with the elephant in the room when it comes to CEO succession," said Alan Kaplan, founder and CEO of Kaplan Partners, an executive search firm. "As a result, a lot get caught. They're forced to decide [to] go outside … or sell the bank."

One high-profile scenario played out in the lead-up to the financial crisis, when Wachovia fired Ken Thompson in June 2008. With no clear-cut successor, the Charlotte, N.C., company spent weeks looking for a replacement as the crisis deepened. Wachovia's fate was all but sealed by the time Robert Steel, a former Treasury Department official, was hired; the company was soon sold in a fire sale to Wells Fargo.

Not all banks fall victim to a succession miscue.

Twice in the 1980s, BB&T had to appoint a new leader following an unexpected death in the corner office. The Winston-Salem, N.C., company, in response, expanded the size of its executive management committee and dedicated more time to succession under former CEO John A. Allison and his replacement, Kelly King.

Mercantile has also taken steps to avoid being caught flat-footed.

Fourteen months before Price disclosed his retirement plans, Mercantile appointed Kaminski to become CEO of its bank. Though no one said so at the time, it was the first step in the company's transition. The move allowed Kaminski "to get the feel of being a CEO, and he has done a fantastic job," Price said.

After he turns over his day-to-day duties to Kaminski in January, Price will remain chairman, though he plans to gradually reduce his involvement until he "ceases to be an employee" in May 2018.

At Dime, Mahon became president of the company and its bank in January, setting him apart as Palagiano's natural successor. Palagiano will remain Dime's chairman after being re-elected to a three-year term in May.

Mahon's appointment "reflects the board's thoughtful approach to succession planning," George Clark Jr., the company's lead director, said in a recent press release. Mahon "has demonstrated proven leadership skills over his 36-year career with the bank, and his business vision and in-depth knowledge of the organization make him uniquely capable and qualified to lead Dime in the years ahead."

Cullen/Frost, meanwhile, noted when it disclosed Evans' retirement that he would stay on as "strategic counselor" to Green for at least five years.

Those banks may be the exception, rather than the rule, when it comes to succession planning, Kaplan said. As an industry, banks "haven't been grooming people for 20 years now and the chickens are coming home to roost," he said, adding that the average CEO age is 57.

In many instances, a CEO with a lengthy tenure might be reluctant to call it career, which in turn could frustrate other executives and lead to an exodus over time, industry experts said.

"In some cases an older CEO can still be very effective as a manager but unwilling to put a stake down in the ground regarding their" future plans, Kaplan said.

Still, banks can do a good job with leadership succession if they make it a priority. That could involve having more training, allowing bankers to have broad experience running different business lines and holding frequent discussions with executives and directors over a CEO's retirement plans.

"If you're planning properly and if you're grooming talent and cross-training, then you'll have a pipeline, even if it's only one or two" executives, Kaplan said.

"Talent development should be a key attribute for banks," Edrington said. "They need to recognize that there is a tomorrow."