Among CEOs, Kelly King is a rare breed. He talks with enthusiasm about the person who will succeed him several years hence, yet he does not know who that person will be.
Even more remarkable is that King has barely gotten his CEO seat warm. It was only in January, after working at BB&T since 1972, that King succeeded longtime CEO John Allison at the $137 billion-asset bank based in Winston-Salem, NC. Not that he's looking forward to leaving just yet. He's got plenty he wants to accomplish during his tenure. But he is, by his own account, the product of the bank's long-term commitment to leadership development, and it is clearly a point of pride in the institution for which he has long served.
"We're designed to grow leaders from day one. Not only am I 100 percent confident that when I retire my successor will be quite capable, but I'm confident that person is already here. And I'm also certain the person who will become CEO in 30 years is already here," says King, who is 60 and faces obligatory retirement at 65. "Ultimately a sense of achievement comes from knowing the organization not only survives, but thrives after you go."
Alas, this is not a philosophy shared by all. The financial crisis has unveiled many uncomfortable truths about the workings of banks, and one is the revelation that many, whether hometown institutions or global behemoths, lack succession planning.
Citigroup and Wachovia, for instance, both cast about frantically for CEOs after the fall of Chuck Prince and Ken Thompson, and these are just the two most high-profile examples.
The inattention is a serious problem say bankers and analysts. Succession planning is vital to attract and retain talent, to train and nurture good leaders, to instill the philosophy of an organization, to understand the scope and working of these complicated institutions, and for business continuity in general. Poor talent management forces companies to reach outside the organization for leaders. Sometimes an external hire is appropriate, of course, but more often it's a sign the board of directors and senior management have failed in one of their chief duties. Sources cite studies from the National Association of Corporate Directors that show that external hires typically fare more poorly than internal ones. What's more, external candidates are more costly to hire, and often cause strife among those passed over for the job.
Fortunately, there are signs that more banks are paying attention to succession planning. The financial crisis has motivated many boards of directors, who have found their ability to replace management clearly inhibited if leadership development is not ongoing and a succession plan is not in place. But if the financial crisis is an immediate cause for the stepped up interest in succession planning, there are several proximate causes: long-term consolidation of the industry that has reduced training opportunities, demographic trends driven by retiring baby boomers, and the steady realization that in an age of commoditized products and services, people differentiate organizations, and these people need inspirational leaders.
About 80 percent of corporate boards believe succession planning is important, but only 25 percent think they do it well, say Carlos Rivero, president of Oliver Wyman's North American Operations for Delta Organization and Leadership, and Deborah Brecher, a senior partner in the same group. Though the study examined all industries, the results were typical across corporate America.
There are several reasons that succession planning gets short shrift, observers say, and both CEOs and the boards of directors share blame. For starters, many CEOs avoid succession planning because it touches on their own mortality. "Deep down we all think of ourselves as immortal, and there's a reluctance to face the fact that we're not going to be around forever," says Norman Beatty, CEO of First Hope Bank, a $400 million-asset institution in Hope, NJ. "But CEOs need to be involved, and not think of themselves as indispensable."
Another reason for CEO foot-dragging is political preservation. "Without a succession plan, they know it's harder for the board to fire them," says James F. Reda, a compensation consultant at James F. Reda & Associates in New York. To encourage CEO participation, some boards are getting creative, linking incentive compensation to identifying replacements, says Terry Saber, head of Saber & Associates, a firm that consults community banks.
Those who study and practice succession planning say boards of directors must take ownership of the process. "It's absolutely critical they are involved and they have to be regularly engaged in the CEO's assessment of subordinates," says King of BB&T. This is easier said than done, of course. Proper succession planning - which should always be viewed within the larger context of leadership development or talent management - is an ongoing process that requires a monetary and time commitment from the board that can seem easier to ignore. Some boards are also dissuaded from succession planning for fear that by "picking winners" they will encourage political jockeying. This, succession planners say, is obviously occurring anyway.
A board's chummy relationship with the CEO, or its lack of industry knowledge, can also hobble succession planning. "Boards find it difficult to take action that CEOs don't initiate because they are picked and informed by CEOs," says Nell Minow, editor of The Corporate Library, which rates boards of directors. However, since the Enron scandal, boards of directors are required to hold at least one meeting without management, and one question they should always discuss is how the organization is approaching succession planning. "It must be controlled by the board, not the CEO," Minow says.
Hunter Hollar, who recently stepped down as CEO at the $3.2 billion-asset Sandy Spring Bancorp in Olney, MD, to make way for a new CEO, says he was insistent on succession planning. "So it was not hard for the board to buy in." But among community banks, "boards are more likely to leave succession planning up to the CEO. It's not high enough on boards' priority list, frankly." The problem is two-fold, he says. "The CEO has brought in acquaintances, so boards don't always feel independent enough. And the board is made up of local small-business people who don't have the breadth of experience in important corporate matters like succession planning."
So, while boards of directors ideally take the lead in succession planning, more often than not the CEO is the prime driver. The good news is this is happening more often. "We see smaller and mid-sized institutions paying a lot more attention to succession planning than they ever did," says Doug Adamson, evp of the Professional Development Group at the American Bankers Association. Recently, for instance, a bank president lobbied him to send an svp to a seminar the ABA hosts exclusively for bank presidents. He really wanted him to be there because he thought the svp might be CEO, "not this year, but in five years. That was impressive."
A dry leadership pipeline eventually weakens an organization, throwing into jeopardy its performance and, over enough time, its independence. And bankers now turning their attention to succession planning are finding just how tough the job of filling that leadership pipeline will be. Community bankers could once pick off managers who went through formal training programs at large banks. But those programs petered out in the 1990s as larger banks consolidated and cut costs. As the industry consolidated and these feeder programs dried up, many young talent left the industry. "We lost a generation of leaders," Adamson says.
There are also powerful demographic trends that impact succession planning. Today there is a gap at many banks between top management in their late 50s and 60s, and those in their 30s. That gap will become all the more glaring as these baby boomers retire with fewer and fewer candidates to take their place. "Over the next 10 years, for every seven people who retire, there are only four to take their place," Adamson says. That reality hit the executives at United Bank of Michigan in Grand Rapids, which implemented a succession plan last year. "We realized that all our senior managers were within five years of each other, 55 to 60, so succession planning is something we should be doing," says Arthur Johnson, CEO of the $420 million-asset bank.
In response, banks must focus their efforts on identifying, training and then hanging on to talent. At BB&T, each manager at five different levels of the organization is asked each year to name two or three potential successors. At the $16.6 billion-asset TCF Financial Corp. in Wayzata, MN, evp Barbara Shaw explains that each year the regional presidents meet to pitch and discuss which vice presidents and senior vice presidents might be good candidates for the leadership development program. From this pool about 30 are chosen. "TCF prides itself on promoting from within, and we start from the beginning to groom them to take on roles."
Once identified, succession planners say, these people should be channeled into professional development programs. They should create mentoring programs, and give them access to the CEO and other top mangers at the firm. "Make the development plan clear for young talent, and you get buy-in," Adamson says. If they can see a clear path up, they know what's expected of them, can see the rewards, and are more likely to remain. "There is a risk management component to this," Adamson says. "You need to avoid the risk of having them leave you. These are exactly the kind of people others want to pick off."
Saber of Saber & Associates says banks should "re-recruit" the top 20 percent of their employees each year. Begin by understanding who the "A" players are, she says. "You should track what percentage of the education and training budgets are going to these people, what percentage is leaving the firm... [and ask] what are you doing to groom management?"
Giving so freely of the top executives' time is excellent for the development of young talent, says Adamson, but it also works in the opposite direction. Top managers have a pulse of the leadership pipeline. They can see who's continuing to rise, and who's beginning to falter. Thus they can constantly refine their top pool of talent. "We orchestrate careers, so they move around the company and get different experiences," says BB&T's King, who adds that about 200 people are in the leadership development process. "And as they come along, you spot people and focus more attention on them. You give them tougher assignments, more quickly, and see how they develop."
Here King touches on an oft-cited leadership development dilemma: a reluctance to move people around the company to give them a rounded experience. Seamus McMahon, a vp at Booz & Co., explains that banks, given their wide scope of products and services, from retail banking to investment banking, are more varied than many other types of companies and require deep expertise in each functional area. Thus, when employees excel in one area there is often reluctance to move them elsewhere. Yet it's the very complexity of banking that makes rotating future leaders through the organization so important, otherwise they won't understand the entirety of the business. As Adamson puts it, "You need to move them around the organization. Even though maybe it's the last thing you want to do, now you are really developing leaders."
Shaw says that TCF firmly embraces this rotation strategy. "We believe that two of our most important positions are branch managers and regional managers. We have a feeder pool identified as becoming branch managers, and we put them through a rotation of branches, including the back office. It's important they understand how the call center works, how loss prevention works, and how the back office affects customers and employees."
Executives at First Hope Bank apply succession planning to more than just the top positions as well, but more broadly across the organization. The real succession issue at smaller banks is not just who will be the next CEO, but who will be the next senior lender and branch manager, Beatty says. And the ABA's Adamson observes that more and more banks are incorporating this deeper view when they make an initial hire. They're not just hiring someone for the immediate position, he says, but someone who could fill more senior position three or four links up the chain.
Besides identifying talent, offering this talent leadership development, and rotating them through the organization to gain experience, there is also the issue of pay. Bank executives must be mindful that their best and brightest, the ones they shower attention on, are the ones most coveted by other institutions. To help keep them aboard, paying them a bit more is money well spent, argues Reda of James F. Reda & Associates. "You're better off keeping your leadership pipeline intact, even if you're overpaying a bit; it's like an insurance policy." It doesn't have to involve enormous sums, he says, but it does need to be targeted. "A shotgun approach is not going to work," he says, but if you pay the top 10 percent an additional 10 percent, that amounts to an overall payroll increase of only one percent.
All of these efforts around succession planning can have less obvious, and yet powerfully positive effects on an organization. Both Beatty of First Hope Bank and Sandy Spring's Hollar say hiring from within helps to instill and preserve the culture of their institution-in the case of Sandy Spring its roots as a bank founded by Quakers in 1868.
And TCF's Shaw notes another benefit of well-planned leadership development: reduced turnover of the rank-and-file workers. TCF executives noticed that when a branch manager left, many front-line employees did too, creating significant disruption. By retooling its leadership development in a way that encouraged branch managers to stay put in one location longer, TCF significantly lowered turnover.
Still, the greatest benefit for succession planning is the most obvious: having managers trained and ready to lead the institution without a hiccup and, hopefully, onto greater things. "One upside to the current economic problems," Johnson of United Bank of Michigan says wryly, "is that this [younger] generation had never been through a downturn and gone through the lessons." Now, with the bank's succession plan in place, these young managers are in on all the meetings as United works through the crisis and will be better managers for it in the future.
As Beatty puts it: "You don't want the organization better off that you are gone, but better off that you were there."