Managing Transition Risk

8 tips for a successful succession plan

One of the biggest challenges community banks face today is a shortage of banking talent. So, it’s critical for banks to develop a solid succession plan to manage transition risk. When key management personnel retire or leave unexpectedly, a succession plan helps ensure that the bank is prepared for the change and proactively addresses the vacancy.

Tailor your plan

Keep in mind that your succession plan must be tailored to your bank’s size, complexity, location, culture, risk profile, product and service mix, management “bench strength,” and other characteristics. With that in mind, here are eight tips to get you started:

  • Look within. There are many advantages to identifying internal candidates to succeed the CEO and other key management personnel. They’re already immersed in your bank’s culture and are familiar with its operations, goals, and strategies. Another big advantage of promoting from within is that your board of directors is likely already familiar with internal candidates’ work and personalities.


  • Have a leadership development program. A formal program for developing potential successors improves your chances of identifying internal successors. By providing training, mentoring, and coaching, you help candidates develop the skills they need to succeed in a management role — and you have an opportunity to evaluate their performance over time. In addition, your investment in employees may help with retention.


  • Consider external candidates. Although promoting from within has significant advantages, in some cases considering external candidates may be necessary or desirable. For example, if a CEO or other executive departs unexpectedly, you might not have a suitable internal candidate. Or perhaps the board feels that your bank would benefit from an outsider’s fresh perspective or experience at other types of institutions.


  • Look beyond the CEO. Many banks’ succession plans are limited to the top role. But it can be equally important to plan for the departure of other key positions — such as the CFO, chief risk officer or chief technology officer — as well as division or department heads who are critical to the bank’s operations and success. As you review your bank’s organizational chart, examine each position, consider the potential impact of a sudden vacancy and plan accordingly.


  • Think both short- and long-term. It’s important to have a short-term plan in the event someone leaves unexpectedly. This may involve designating interim successors who can fill in until a permanent replacement is found (which, in some cases, may be the interim successor). To minimize disruptions, a bank can use cross-training to ensure the availability of backup staff who can assume management responsibilities on an interim basis.


  • Make implementation part of your plan. Outlining your succession goals and strategies isn’t enough. Your plan should also include a “playbook” that sets forth processes for implementing the plan. For example, if you plan to hire from outside the bank, the playbook should specify where you’ll look for candidates, where you’ll post job listings and how you’ll identify the right people for the job. It might include checklists or other tools for evaluating candidates.


  • Communicate your plan. Transparency is key. It’s important to communicate your plans to all involved and manage candidates’ expectations to avoid losing people when one person is selected as successor. Make sure participants view the process as a career development opportunity, not a competition, and that you have a clear career path for those who aren’t chosen.


  • Revisit your plan regularly. A succession plan isn’t something you can put on a shelf and forget about until it’s time to implement it. To ensure that your plan continues to make sense for your institution, review it periodically and update it if necessary to reflect changes in your bank’s strategies, size, product and service offerings, regulatory environment, or other circumstances. Suppose, for example, that three years after developing a succession plan, a bank implements mobile banking applications and other digital technologies and hires a CTO. Unless the plan is updated, the bank’s operations could be disrupted if the CTO leaves.


Start early

Ideally, succession planning should start several years before potential succession events. You’ll need to give yourself plenty of time to define the qualifications you’re looking for, draft job descriptions, and evaluate internal and external candidates. You’ll also need backup plans for unexpected departures. By planning for management transitions, you’ll head off transition problems before they have a chance to derail your bank.


Sidebar: Regulatory expectations regarding succession planning

Federal banking agencies view succession planning as a key governance and risk management tool. In a recently published Q&A on succession planning, Federal Reserve representatives note that “management capabilities and succession prospects are considered throughout the examination process” and that these factors influence the “assessment of the bank’s viability.”

The Q&A also says that “given the importance of maintaining qualified bank leadership, any significant disruption in the bank’s operations can have far-reaching, negative ramifications for a bank’s safety and soundness. Hence, an effective succession plan is nimble enough to respond to changes in bank leadership in a timely fashion.”

Contact one of our experts with any questions about managing transition risk.

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