The huge market challenges facing banks — from digital disruption to sluggish post-crisis growth — have increasingly put pressure on bank management to try to overhaul their institution's business strategy. Yet the best solution for banks to overcome these challenges is often to overhaul their management.

Although management succession is a critical board function, it is often underappreciated, especially in industries such as banking that are undergoing dynamic market changes. Banks must come to grips with the fact that they may be ill-equipped to deal with the upheaval without new faces in the corporate suite.

Unfortunately, when facing disruption, many institutions with established management teams are gripped by organizational inertia. With changes in the industry taking shape gradually — dulling the threat perception — senior executives may not recognize their significance until it's too late to adapt.

Despite declining earnings performance and nonbank competition, many banks have remained on their current management path, which poses a risk to their relevance. Paradoxically, incumbent market leaders with strong cultures are at the greatest risk. With their organizational philosophies ingrained, they are positioned to fail in adapting to new competitive, technological and economic developments.

Many are unable to acknowledge their current strategies no longer produce acceptable shareholder returns. They focus instead on the false remedies of cost-cutting and expensive desperation acquisitions instead of real strategic change. As expected, bank stocks continue to lag the major stock indexes with many trading below book value. Bank investors recognize the change even if bank CEOs do not. Predictably, shareholder activism is increasing as investor impatience over performance problems grows.

It is unrealistic to expect current management teams to make needed painful changes. These teams grew up with and developed the existing strategy. Consequently, they are prone to the confirmation bias: They ignore information inconsistent with their beliefs. Legacy teams rationalize current market changes as cyclical, not transformative. Thus, they intend to wait for the return of the old normal instead of dealing with the market as it is. This is likely to be a long wait, or one that never ends.

Generational change is required to allow needed transformational change. Fortunately, many of these teams are nearing retirement, either voluntary or involuntary. Boards can aid the change process by focusing on the strategic consequences of management succession even more so than they have in the past. They should establish a specific succession framework acknowledging market developments, and communicate that framework to investors.

The process starts with a strategic review based on the new industry environment and the bank's position in its market. Does the current strategy make sense given market developments? Specifically, can you realistically expect to earn your cost of equity capital in the foreseeable future? The focus is on what would change if the current management team was replaced by outsiders. Boards can establish an experience and skill profile based on the review to determine who is best suited to implement the changes.

This profile is unlikely to look like the current CEO. This is why the process should be led by an independent lead director. Otherwise, you are likely to get just a younger version of the current CEO when a different type of leader is required. A review of candidates, internal and external, based on the revised strategy is the next step. Internal candidates, historically the most common source, are seen as less disruptive and lower-risk choices. Internal candidates should, however, have a different career path than the current CEO to ensure diversity of thought.

For firms with strong cultures, an external candidate does present higher risk, but looking beyond the bank's current leadership may be favored to signal the end of business as usual. A new strategy requires a new and committed future-orientated management to implement it. There are well-known examples of banks choosing this higher-risk path to great success. When JPMorgan Chase bought Bank One, it tapped the target bank's then-chief executive, Jamie Dimon, to run the combined company.

What got current market leaders to where they are now may be insufficient to take them where they need to go. The future is rarely like the past. All strategies age and eventually fail to deliver acceptable returns. Consequently, boards must guard against a rigid devotion to the status quo and best practices. Boards have a rare opportunity to preserve their institutions' relevance by selecting management with the forward-looking vision necessary to devise and adopt strategy for the future.

J.V. Rizzi is a banking industry consultant and investor.