6 common succession planning mistakes (and how to avoid them)

What’s worse than a glaring hole in your current org chart? One contender is a lack of thoughtful succession planning. Without careful planning, a bank might have a full roster of executives, but a sudden retirement, illness or other unanticipated event could leave board and management lacking the talent they need and scrambling to fill key slots.

The median age for today’s banking CEOs is 58, according to a 2019 survey of bank executives, and more than 40 percent of survey respondents had not identified a potential successor for the chief executive spot. 

What’s more, even those community banks that are actively engaged in succession planning may not be ambitious enough. Considering which individual will succeed the president or CEO is only one aspect of a thorough succession planning exercise. More important is understanding a bank’s future strategy—and how that strategy might determine which individuals should run the bank going forward.

Ideally, succession planning would proceed in lockstep with the identification and fulfillment of a bank’s diversity, equity and inclusion (DE&I) goals. Evidence is mounting that companies with diverse leaders are economically outperforming their peers.

McKinsey & Company found that organizations in the top 25 percent for gender-diverse executive teams were 21 percent more likely to outperform on profitability and 27 percent to outperform when it comes to value creation. Ditto for ethnically and culturally diverse executive teams. Here, McKinsey found that such teams were 33 percent more likely to lead their industries in terms of profitability.

Common succession planning mistakes

While the case for proactive succession planning is strong, there are pitfalls. Here are some common mistakes:

1. Beginning the process too late

Regardless of the age of your CEO, president and other leaders, you need to begin succession planning as early as possible. Finding the right talent takes time and the process is too important to rush.

2. Failing to think strategically

Community banks that devote their time and energy to identifying a single individual to fill the CEO’s shoes are largely missing the point of succession planning. Instead, you want to view succession planning as a subset of your larger strategic plan. Your future strategy should be driving which individuals you nurture and promote—not the other way around.

3. Having no emergency plan

While succession planning is an ongoing and evolving process, banks need to remember that vacancies rarely occur according to a predictable timetable. Beyond identifying which individuals can be cultivated for specific roles, a bank needs to know who can step into high-profile positions in a pinch.

4. Overlooking DE&I

Community banks have the best chance of shifting their racial, ethnic, and gender make-up when they include DE&I in their succession planning goals.

Even as stakeholders are scrutinizing corporate DE&I efforts more carefully, very little solid progress has been made. By late 2020, just 5.7 percent of CEOs at Russell 3000 companies were women, according to Heidrick & Struggles, an executive search giant. This represents a net increase of only eight CEOs in 2020. The situation is murkier for racial and ethnic diversity. In 2020, around 98.9 percent of Russell 3000 companies and 96.2 percent of S&P 500 companies included no information about the ethnicity of their CEOs in their proxies, according to Heidrick. At S&P 500 companies that do provide this information, around 90 percent of CEOs identified as white/Caucasian.

5. Having a bias for internal (or external) candidates 

Some banks have a marked preference for hiring from within. For community bankers, who pride themselves on their strong employee and community relationships, selecting leaders from the existing workforce may be a deeply-held value, but promoting from within isn’t always possible. One drawback is that each internal hire creates a new vacancy within the bank. No wonder, then, that the 2020 study by the Institute for Corporate Productivity (i4cp) found that only 28 percent of respondents described their companies as effective at identifying high-potential employees from within the existing workforce.

Recruiting talent from outside may be equally challenging. Here, the i4cp study found that only 29 percent of respondents felt their organizations filled critical roles with external candidates effectively. If your bank thinks it might need to search more widely for future talent, remember to begin researching third-party advisors and executive recruiting firms early.

Because succession planning is so critical, community banks may want to cast their nets as widely as possible, considering both internal and external candidates.

6. Being too discreet

Talking about succession with employees can be an uncomfortable conversation. And yet when a bank makes hiring assumptions without first asking candidates whether they’d want to be president or CEO, time and energy is often wasted on a succession plan that might never work. Talking honestly with employees about whether they aspire to someday lead your organization can also help a bank determine the right career development steps to nurture existing talent.

If you’re not ready to hand your keys over to another financial institution via acquisition, it’s time to get serious about developing your internal bench strength. Preparing your rising stars not only ensures that your FI will be more agile and competitive now and into the future, but also enables you to leave a legacy of success for your community for generations to come.