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Archive for the ‘Leadership’ Category

Boards of Directors have a difficult, but critically important job to do with CEO succession planning.  If a Board selects the right person to succeed a departing CEO, shareholders, employees and regulators will be happy with the results.  On the other hand, a failure with CEO succession can bring about the failure of the enterprise.  If it is not THE most important thing a Board does, it is very close.

I am often asked whether a retiring CEO should be on the Search Committee.  There are times when the answer is an obvious “no.”  However, there are situations wherein the Board feels more comfortable with their role if they have a long-term, successful CEO heavily involved in the process.  My 35 years of participation in these processes has taught me that no two companies are exactly alike, so there is no right or wrong answer to the question.  To me the ideal is for both the CEO and the Board to have important, but different well-defined roles in the process.

The most productive role for a CEO in succession planning starts the day they become CEO.  From the beginning, a CEO should start preparing their potential internal successors by assessing strengths and weaknesses, getting them training, development and coaching as needed while exposing them to the Board.  The CEO should be sure the Board understands the efforts being made to develop successors internally and frequently share candid assessments with the Board.  If this work is done properly, the Board should have a good idea of their “bench strength” in case of an emergency and when it is time for the CEO to retire.

Roles Fork

CEO and Board work together until decision time

The role of the Board (usually with the help of a Search Committee) is to select the best candidate from inside or outside the company.  If the departing CEO has done his/her job, the internal candidates should be strong contenders, given their intimate knowledge of the company and its culture.  Nonetheless, today, most Boards feel like it is their fiduciary duty to look outside the company as well as inside.  So, most often the Board or Committee will have some good internal and external choices.  When it comes time to make a choice, a long-term, successful CEO should be available to the Board, but should take a passive role except in extenuating circumstances.

The departing CEO will justifiably favor the internal candidates, and any external candidates the CEO brought in early.  However, the departing CEO is most often not going to have to live with the consequences of the selection.  The CEO can still be on-call with the Board to answer technical questions about the job, but the sorting and grading of the candidates should not include the CEO unless there are strong reasons to include him or her.  Sometimes, the Board will choose a successor a year or two before the departing CEO steps down, in order to give the new CEO time to learn from the departing CEO.  In other situations, the departing CEO will be staying on in a Board role, which has its own issues that we will discuss in a future blog.

For now, suffice it to say that including a CEO in the final selection of their successor is fraught with issues and should be avoided unless there are compelling reasons to keep them involved to that extent.  If it would help your Board to have a full discussion about this issue, call me at 919-732-2716, or click here and give me your contact information.

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Citi is finally getting CEO pay plans right! After losing their shareholder “say-on-pay” vote at the 2012 Annual Meeting of Shareholders, new Chairman Michael E. O’Neill, who just took over as Chairman last April, interviewed a large number of important shareholders. He was told that paying their CEO a $6 Million Incentive based on a two-year (2011 and 2012) cumulative pre-tax profit of $12 Billion, may sound like a good deal for the shareholders, but it was fraught with problems.

carrots

Incentive Pay Must Be Carefully Designed

To begin, the Company had 2010 pre-tax profit of approximately $12 Billion. So, the hurdle for earning the $6 Million was half of the actual earnings in 2010. Yes, the economy has made earnings difficult to produce, and yes, Citi is trying to overcome internal problems, but shareholders were unwilling to allow a hurdle rate that low. There were other problems with the design of the Plan.

Cumulative two-year pre-tax earnings ignores the fact that the bank could grow assets at a decreasing return on each dollar and meet the earnings hurdle while increasing their capital requirements significantly. Using volume of profit as a management performance measurement always has this inherent problem. In fact, increasing volume of profit can and often does result in lower returns on equity in banking. For that reason, shareholders can lose as management earns more, and a lose-win plan is never good.

Finally, building on the last point, there is no clear link between shareholder returns and management pay in the Plan Citi was using. A common objective of executive compensation plans is to align the interests of management with those of the shareholders. The old Citigroup, Inc. Plan did the opposite to some degree. The Board of Citigroup consists of intelligent and successful people, but they got some bad advice along the way. After Chairman O’Neill spoke with shareholders, he tasked the Board’s Compensation Committee to redesign the CEO’s Compensation Plan to address the shareholders’ concerns. He was not about to get a negative “say-on-pay” vote after his first year as Chairman.

Now, in my many years of studying and designing executive compensation plans, I have yet to see the perfect plan. It just does not exist. Business is too complex to allow for such a thing, and the need to keep the plan as simple as possible is an important constraint.  Yet, the new Citigroup, Inc. Management Compensation Plan addresses shareholder concerns with an elegantly simple design.

Executives will be granted units worth a certain amount in three years if certain performance is achieved.  Citigroup stock must perform in the top three-quarters of a carefully selected peer group of stocks of similar companies, and Citigroup’s Return on Average Assets over the three years must beat a hurdle equal to the previous year’s actual or there will be no units rewarded.  Furthermore, if the Return on Average Assets over the three years is better than the previous year by a significant percentage, then a target number of additional units will be awarded.

This design is superior to the old design because it clearly:

  1. aligns management’s interests with those of the shareholders and
  2. it is tied to relative performance compared with peers as well as the Company’s strategic goals.

There are some potential draw backs to such a plan, but the new plan is so much better than the old plan, I will not spend words on the risks in this particular blog.  Perhaps in the future, we can look at some of the potential flaws.  In the meantime, I say congratulations to Mr. O’Neill.  I may go buy some Citigroup stock!

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It is never too soon to start developing a succession plan for the top executive positions in an organization. Such plans take time to develop and come to fruition. Here is a brief outline of the steps:

Planning

This step should be in process continuously. It involves determining which positions need successors and what knowledge, skills and abilities will be needed for those positions in the future to have a successful enterprise.

company-organization-chart

Development, when affordable, should start early.

Development

This, too, is ongoing. It is the training and development of the inside candidates and the search for and recruitment of outside candidates that fit the ideal candidate profiles. This step takes time to implement…maybe years if you hope to develop talent internally.

Selection

Here you are screening, selecting and negotiating terms with the successor. Often, you will need to circle back and revisit plans and development steps if strategies change. Eventually, though, a successor must be chosen.

Transition

This is the handing off of the baton from a retiring executive to his or her successor. It is fraught with risk and should be carefully planned and

monitored. Most new employment relationships that are going to go bad will do so during the first six months while a transition is occurring.

There is a lot to do to make succession planning work. We will be happy to present an overview of the process to your executive team and/or Board at no cost

.

Click here and request a contact, or call me at 919-732-2716.

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Succession Planning

Passing the Baton

When our Firm initiates a new CEO search or Succession Plan, we work with the owners and/or Board of Directors of the client company to build an “Ideal Candidate Profile.” This profile, while useful, is a target which can seem unrealistic when you start to see real live candidates. I often simplify the Profile to a short list of Knowledge, Skills and Abilities (KSAs) that are critical. This becomes a “must have at a minimum” list. We recently produced a list of critical “musts” for a community bank CEO search. Listed below are the five traits that we all agreed were needed by any bank CEO of the future:

  1. Ability to see local community needs and think outside the “Banker Box” to envision how the Bank can satisfy the unmet needs.
  2. Ability to inspire all constituencies with a vision that creates value for customers, staff and shareholders.
  3. Keen risk management skills to manage risk under all economic scenarios.
  4. Ability to manage a wide diversity of products and service lines.
  5. In-depth understanding of how technology is changing the marketplace.

Given enough time, some of these critical KSAs can be developed with internal succession candidates, but there must also exist within such candidates a propensity to think

broadly and deeply enough to be simultaneously analytical, creative and eloquent. Often, an outside candidate is

able to strengthen an already strong intern

al team with these KSAs.

I would be happy to present this and other succession planning topics to your owners, Board and/or your Management Team as an introduction to our Succession Strategy, Executive Development and Executive Search services. Call me at 919-732-2716 or click here and complete the request form on our website and I will reach out to you.

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Change?  No change is necessary.

That is what some bankers thought when their institutions began to suffer the first shocks of a quake that started rattling the financial industry in the mid-1980s.  These bankers figured that if they just hunkered down and minded their own business the tremors would subside.

Bank Strategic Planning

Bank Failures Since 1979, Source: SNL Financial and FDIC
Number of Failed Banks in 2012 is annualized based on 23 failures as of 5/1/12

Instead, many banks – and bankers – vanished.  From 1988 to 1992, the U.S. banking industry witnessed more bank failures than ever before, especially in any comparable five year period.

The reasons were complex.  Massive change hammered the industry.  New banking laws and regulations altered how financial institutions could do business and increased base-line costs.  For banks that were already on shaky financial footing, new capital requirements dictated cutbacks and/or injections of hard-to-find investment dollars.  The debut of interstate banking intensified price-cutting campaigns to win market share, and margins began to shrink.

Sound familiar?  It’s de ja vu all over again!  “Same events, different time.”  The earthquakes returned in 2008, and the financial world began to come undone once again.

For survivors of repeated quakes, reality has arrived.  If we hope to retain our jobs and help our institutions withstand external pressures, we had better prepare for life in an earthquake zone.  Strategic Planning is needed today more than any time since the 1980’s.  Through strategic efforts, banks can intelligently re-engineer their institutions to gain the resilience and strength needed to absorb shocks – and even expand – in our unstable economy.

Strategic Planning is extremely challenging in this environment, since it requires looking at the future and making assumptions.  Today, about the only given is that more massive change lies ahead.  Yet, an outline is emerging of the future that banks will face.  Over the next four or five months, we will comment on dealing with specific trends.

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The plan is never finished.  Strategic Planning is a process that never ends.  Banks should revisit their strategies every 12 to 18 months.  Bankers should ask these questions to reassess internal attitudes and the outside world:

  • What have we done successfully?
  • How has the competition reacted?
  • What is different in our environment?
  • Should we continue on current path or make changes?
  • Are any failures due to poor strategies or poor execution?

For strategic planning to succeed, management and the Board must view the process as an ongoing commitment—not an exercise to satisfy regulators.

Management and Board must reach consensus.  Poor communication between a bank’s management and its board can present hurdles.  If these two groups do not have a shared vision, strategic planning has little chance to succeed.  Therefore, it is crucial to engage both groups in the planning sessions.

Many voices must speak.  A CEO and one or two people may complete a strategic plan without involving any of those who execute it.  The plan will be impractical, and managers will have no personal investment in its success.  Banks should search for ways to let employees share in the rewards and risks inherent in the development of strategic plans.  This may mean rewarding performance using bonuses or incentives, stock plans and other alternatives to pure salary.

Strategic Planning

Strategic Planning Cannot Predict the Future

Follow-through is essential.  A frenetic management style can create difficulties.  The CEO and board may eagerly develop a strategy, but lose interest when it comes to monitoring progress and overseeing implementation.  As soon as the first crisis comes along, they forget about the planning.

Power to harness change creatively.  Strategic planning cannot predict the future.  You cannot predict exactly when a quake might hit your institution—or its size and duration.  With strategic planning, you can make wrong decisions as well as right ones.  But strategic planning will help you learn your institution’s strengths and weaknesses and discover how your resources can be marshaled to help your bank survive and thrive.  Strategic planning strips change of its power to frighten and immobilize bankers.  It offers executives the power to harness change creatively.

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The DISC style profile instrument is quick, inexpensive and impressively accurate in capturing work style preferences. Instrument is a basic 4 quadrant profiler that has been around since 1934, has been enhanced/validated several times,and is available via web. Great tool for search and selection as well as team building. The DISC is only available through a certified consultant.

I have been a certified user/provider since 1991.  We use it at MYMC in our search and team building practice areas, and also supply it to clients. We train clients in interpretation/usage of the instrument, support client usage, and/or simply provide clients with a secure web-based profiling process. I have seen consultants and clients overuse and over-rely on profiling instruments – using numerous instruments in the mistaken thought that they then have all the answers. Such over reliance abuses the very process they were brought in to support, and often the participant as well by trapping him or her in a limited “box” of prescribed behaviors, while also increasing the cost. I recommend a more thoughtful and selective approach to using supportive instruments for search and team building. While valid instruments can provide insights into capabilities or preferences, they can never replace the need to talk with people. We have found that while people have preferences, they also, in the right circumstances, have a remarkable range of performance capabilities. We at MYMC try to always look at “what are we trying to accomplish” first, and then use a few (seldom more than one or two) select and targeted instruments to augment our interview and team building processes.

The right instruments can help provide insights and even a meaningful framework within which to examine how an individual fits with the requirements of a particular job, or into an existing or newly formed team.  Ever have doubts about whether or not you really know that team-mate or candidate? Ever get fooled by circumstances, a clever interviewer, or a halo effect? Then try augmenting your interview, selection and or team building processes with instruments like the DISC Style Profiler.

We will be glad to assist.  Call me at 919-644-6962.

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