'Succession Blues': Many Banks Are Singing It

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If the directors of Bank of America Corp. were caught flat-footed last week by the news that their chief executive officer wanted out, they would have been in good company.

Corporate boards on the whole are woefully unprepared for management transitions, with an estimated 44% of public companies failing to have a formal succession plan to guide them through the process. The percentage, based on a recent survey by the National Association of Corporate Directors, is slightly lower for financial institutions, with just under 40% lacking a formal plan. But given the regulated nature of the banking industry, the volatility in its performance and the new level of scrutiny under which it has been operating for the past year, can any bank have a good excuse these days for not having a plan in place?

"There's no empirical evidence to suggest there's poorer succession planning at financial institutions than at other kinds of firms, but it's kind of astonishing that it isn't way better than average, because these are heavily regulated industries," said Jonathan Macey, a corporate law professor at Yale University. "This is an issue that may be very difficult to solve outside of banking, because shareholders are widely dispersed and can't really galvanize in an effective coalition, but it doesn't take a brilliant regulator to figure out whether a bank has a good succession plan."

Some B of A directors reportedly had made informal overtures to possible replacements for CEO Ken Lewis over the past several months, but company spokesman Robert Stickler said Lewis' decision to retire by yearend put the board "in a position where they had not gone through a process to arrive at who they thought the successor should be."

John D. Hawke Jr., a partner at Arnold & Porter and a former comptroller of the currency, said planning has to be done long before it becomes urgent.

"In these crisis situations, things seem to move fast," Hawke said. "Not long ago, Lewis was in the prime of his management and people weren't expecting a precipitous decline. When you've got somebody who is an excellent manager … succession planning doesn't come foremost to the board's minds, but there comes a time when they must think about it."

The $2.3 trillion-asset company on Friday assigned six directors to a new committee to identify a replacement. Chairman Walter Massey will lead the group, which also includes directors Charles Gifford, Thomas May and Thomas Ryan, along with former Federal Deposit Insurance Corp. Chairman Donald Powell, who joined the board in June, and DuPont Co. Chairman Charles Holliday, who became a B of A director last month. Stickler said the company has not yet been decided whether it will hire an outside search firm to assist in the process.

But those are the kinds of decisions that companies should make as part of routine efforts at succession management, corporate governance advocates say. And with the pressure Lewis was facing from shareholders and regulators, the precedent that the Obama administration set when it forced the resignation of General Motors Corp. CEO Rick Wagoner, and the evidence that CEOs are no less mortal than other humans, the board should have felt compelled to act much sooner on the succession issue, Macey said.

"After the guy gets dinged from his chairman position, the writing is really on the wall," he argued, referring to the April shareholder vote that stripped Lewis of his chairmanship. "So as bad as it is in general for a firm to have no succession planning, the fact that this board still didn't get off its duff to organize anything is really stunning."

Wachovia Corp. similarly was left without an identified replacement in the wings in June 2008 when CEO G. Kennedy Thompson bowed out, just weeks after he had been removed from the chairman post. The company did not even have a widely known contingency plan to cover an unexpected event, such as death, said Wallace Malone Jr., a former Wachovia Corp. vice chairman who served on the company's board from 2004 to 2006.

"If something had happened to Ken, I don't know what would have happened," Malone said. "I might have needed to step in for 90 days, but I wouldn't have done it any longer than that."

Malone said he typically opposes the idea of excessive government involvement in commerce, but he suggested that management succession is one area where agencies might want to get more involved.

Hawke said regulators "absolutely" have a right to look at succession planning as part of management ratings in Camels scores. "They can't tell the bank who should be on the ladder but they can certainly request or demand the bank to provide a succession plan as a matter of safety and soundness," he said.

Of course, some companies have managed to make smooth transitions on their own. BB&T Corp. last year seamlessly transferred power from longtime CEO John A. Allison to his top lieutenant, Kelly S. King. BB&T had learned from experience; two of Allison's predecessors died unexpectedly while at the company.

In an interview last fall, Allison said BB&T had spent five years planning for his retirement after realizing that every member of the core management team was above the age of 50.

For many banks, though, the realities seem to work against the goal of succession planning.

"The big banks have been all about acquisitions. It has been more about operational and short-term, quarter-to-quarter thinking," said Cynthia Carlson of Campbell Carlson LLC, a Charlotte-based executive search firm. "Succession planning is all about long-range planning, and there has not been enough of it."

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