Sound succession planning begins with a fresh definition.

For many community bankers, succession planning isn't something they've really done in a planning context at all--though they may think they've done it.

All too often, the heir apparent has been known for years, but nothing concrete has been done to prepare that person for stepping

However, often the foundation for succession is never truly poured, because the CEO thinks he or she will live forever, and discounts the risk that death or disability will come much sooner than they may think.

And even without death or disability, there is the inevitability of retirement, out of the wish to do otherwise or the acknowledgment that the time has come to pass the baton. Community banking is clearing coming to a outer edge of a major changing of the guard. In the 2004 edition of the ABA/ABA Banking Journal Community Bank Competitiveness Survey, just over half of the CEOs then running community banks were 55 or older, and 75% were 50 or older.

Unsuccessful succession

To consultant Meg Vinton, there are two things wrong with this so-called approach to succession planning.

First, it is episodic. Vinton, president and CEO of Emersus Consulting, Inc., Salt Lake City, sees succession planning as an ongoing process, not a do-it-and-you're-done affair.

She told bankers at the ABA conference that planning involves more than the corner suite, and requires the systematic identification, assessment, and development of leadership in the organization, in order to enhance overall bank performance. Too often, the heir apparent has been selected without a hard look at his or her qualifications.

Second, lax succession planning is dangerous. CEO turnover, especially, can easily become a political powder keg, due to potential public, employee, and shareholder reaction when it is bobbled. Even small community banks can fall victim to aggressive acquirors.

Lack of planning can put a bank into the dangerous position of making succession choices at the eleventh hour, or, worse, becoming vulnerable because succession wasn't addressed at all, or the successor wasn't adequately prepared.

In spite of risks, Vinton said, boards and CEOs give succession planning short shrift. In the 2004 survey, more than a third of the sample did not have a succession program in place.

Vinton said several practices distinguish top performers from the herd. One is that they are continually on the lookout for talented executives, while the herd is driven solely by vacancies. Another is that successful succession planners tend to tie their planning into the institution's strategic planning.

The implication of this, Vinton said, is that the herd solely looks for candidates who fit into the bank's existing culture--the status quo means of looking at markets. If that's where they want to be, that's fine; but not so if they want the bank to change its ways.

By contrast, successful succession planners tend to search for candidates based on where management and the board wish to take the bank. Thus, they hire people who can change the culture, not just maintainers.

Making succession work

Vinton presented six steps to assist in succession planning:

1 Form a succession committee that will design a process to find a candidate or candidates who fit the bank's future direction.

This committee must take the step of analyzing the job or jobs it will be filling to determine what abilities are needed to fulfill its duties. Where a leadership position is involved, the group must determine what type of leader is required to push the bank and its teams in the desired direction.

Vinton said that job analysis is a critical part of the succession challenge. This is because members of a bank's board frequently have very different notions, from one to another, of what it is the CEO does all day. And Vinton says it should thus not be surprising that, in the absence of some serious research and consideration, that the board cannot be expected to know what any executive position below that of the CEO entails, either.

2 Assess potential internal candidates to determine who should be part of development and evaluation.

Vinton believes that employees should be able to nominate themselves for consideration for succession to open or someday-to-be-open posts. Likewise, she believes that they should be encouraged to nominate fellow employees. Those who nominate themselves who don't get the jobs can be shown why they weren't considered up to the job, which could lead to improvement in future performance.

But there's another side of that matter. One of Vinton's clients, Dale Gunther of Bank of American Fork, Utah, told listeners that his bank found that some of the likely succession candidates were quite happy where they were and did not aspire to, nor consider themselves suited for, higher positions. Finding that out early on saved both the bank and the disinterested candidates a great deal of trouble.

Personalities are another issue that have to be addressed. Talent alone doesn't make one the definite winner in a succession race, according to Vinton.

"I've been in client situations where other employees make it very clear that 'If X gets the job, I leave, because I won't work for X'," said Vinton. Such threats, if numerous or highly placed enough, must be taken seriously.

3 Create a process that both grooms and assesses internal candidates.

Vinton is a big believer in developing talent in-house. This can be accomplished not only through training, but through "learn on the job" opportunities that give an employee the chance to develop themselves with "live ammo." Special assignments, coaching from higher-ups, temporary assignment to trouble-shooting stints, or nomination to project teams, are all opportunities.

4 Consider external candidates.

Vinton made clear why she supports internal succession whenever possible.

"One of the keys to making a succession plan work is to hold executives and managers accountable for developing people for the next level," she said. "By developing executive talent in-house, organizations increase their chances of having the right people ready at the right time."

Nevertheless, while promoting from within has much appeal, the best candidate may not be working for the bank.

5 Select the successor.

Using selection criteria outlined at the start of the process, the bank's board and existing management must make some decisions in the end: inside or outside, and who and when?

6 Plan and implement the transition.

And that leads to the end of the process--making succession happen.

If the board and management have done the job right, the candidate has a fighting chance. But it can be helpful for the previous office-holder to stick around for a bit for the sake of transition.

Dale Gunther, for example, said that he has stayed on for a while to help his replacement get his feet underneath him. Having been CEO for 17 years himself, he knew that his presence would help smooth the introduction of the newcomer.

Strap yourself in for 2006 economy

Your bank may already be feeling the deposit-side effects of the flat yield curve, but the "fun" is just beginning.

Mark Zandi, consultant and cofounder of Moody's Economy.com, warned bankers that the credit cycle will be turning in 2006. This will mean not only of a slowing of loan growth, but also a deterioration of credit quality.

Loan growth still has a bit more oomph in it, Zandi predicted, suggesting that it will peak in mid-2006. The credit deterioration will take longer to show up in the numbers--Zandi expects charge offs to begin rising in 2007.

Zandi expects major shifts in the housing sector to result from the higher level of long-term interest rates. These adjustments "will be in full swing by the end of 2006," Zandi said. Home prices in many parts of the country will be falling this year, he said.

There were few bright spots in the picture that Zandi gave the bankers. He suggested that the nation's extremely low savings rate over recent decades, married to the U.S. consumer sector's tendency to consume far more than it produces, was finally coming home to roost. Entire sectors of industrial employment are drying up, replaced by overseas workers.

Along these lines, a banker asked Zandi if the Chinese, holding at that point $250 billion in Treasury bonds, would keep their appetite for U.S. debt.

Now that they've got their "CD," he answered, they will begin looking for more lucrative choices.