- Phil Buffington offers insight into succession planning, a necessity for any organization. He says the time is now to begin that process.
The future success of your organization depends upon your ability to plan and implement a succession plan.
Succession planning, first recognized by Henri Fayol in the early 1900s, continues to be a necessity for any organization, whether it is to address the development of future leaders, the departure of existing leaders or an emergency requiring new leadership.
While the focus of this article is on financial institutions, both general corporations and nonprofits should have effective succession plans. There’s no greater display of leadership than to successfully plan the future of your organization with a well thought out succession plan. Essential elements of great succession planning are: (1) having a process for the plan, (2) implementing the plan, and (3) insuring accountability under the plan.
Succession planning involves a variety of issues, including the board addressing the makeup of its customer base and representative members on the board. It must be remembered that no one plan fits all institutions. The succession plan should be carefully tailored to meet the needs of the institution. It should be noted that management and the board of directors have a duty and responsibility to adopt and implement a succession plan for their organization. As bank regulators continue to insist that banks adopt a succession plan, the board has a duty in and of itself to its shareholders to provide for a succession plan for the future of the institution.
When considering succession planning, most organizations focus solely on the president or CEO. However, the succession plan should include provisions for executive management, key employees, the board of directors and the shareholder base. Most organizations don’t focus on succession planning for shareholders, but this can be an essential component in closely held financial institutions.
One key succession planning tool for shareholders was delt a blow in June 2024 when the U.S. Supreme Court in Connelly vs. United States ruled that proceeds from a life insurance policy payable to a company were properly included in valuing the company for federal estate tax purposes even though the company had a contractual obligation to redeem the deceased shareholder’s shares. The Court concluded that a “hypothetical purchaser” of shares of a family company would not necessarily consider a contractual redemption obligation to be a corporate liability.
When developing a succession plan, the board and management should consider the following items set forth in the FDIC Consent Order 09-367b: (1) obtaining qualified people to replace those people who resign or retire; (2) developing proposed qualifications for new people; (3) outlining a plan of action for soliciting new people; (4) considering needed compensation to attract new people; and (5) setting a time frame for completing the plan. While not mentioned in the Consent Order, the board should also consider the following issues in developing a plan: (1) defining the roles and responsibilities of each position in the plan, now and for the future;(2) assessing the institutions future needs by analyzing data, (3) becoming familiar with candidates being considered for the plan, and (4) having a clear understanding of the transition process.
If you haven’t fully developed a succession plan that meets the needs of your organization, the time is now to begin and finalize that process. After a plan is adopted, it’s imperative that the board of directors evaluate and modify, when necessary, the succession plan at least on an annual basis. After any triggering event under the succession, the board of directors should immediately take steps to update and modify the succession plan. When it comes to succession planning, time is of the essence.
It’s important to ensure that you have successors in place for all key positions in your organization. To determine who should be included, management and the board should do an analysis of the strategic positions within the organization and assess the duties and responsibilities, of the people holding those positions. This will help any organization to insure it has the personnel in place to continue strategic operations of the organization when a triggering event occurs. As mentioned, succession planning for your board of directors and shareholder base is vitally important.
Among others, some important lessons learned in succession planning are: (1) insuring the right people are in place, (2) identifying and developing leaders for the future, (3) training and retaining people; (4) maintaining current market compensation, (5) being proactive in the planning process, and (6) having the commitment from the board and senior management to implement a plan.
The key to the future success of your organization depends upon the planning and implementation of a thorough succession plan. Each institution should assess the organizational structure, the duties and responsibilities of each position, the capabilities of people holding each position and their successors, have a system in place for accountability and determine the depth of personnel existing in the organization and identify needs for key positions. This process should be carefully and strategically evaluated by the board of directors and the board should adopt a plan to ensure complete succession planning for the organization. Failure to plan properly sets your organization up to struggle with future uncertainties and obstacles. Make sure management and the board address the key issues in succession planning and fulfills their obligations to the organization, the employees and the shareholders.
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Disclaimer: This article is made available for educational purposes and is meant to give only general information about the law. The information here should not be relied on for taking any specific course of action, and it is no substitute for individualized legal advice. If you have any questions about a specific course of action or any legal questions you should speak with a lawyer. This article is not intended to create, and the receipt or review of it does not create an attorney-client relationship.
Phil Buffington
