CEO Succession in Banking

The financial sector in Ethiopia, and particularly banks, do hardly any work towards developing future CEOs. You might argue that this is anecdotal evidence, but I have surveyed various bank executives to find out if there is an ongoing, constant, and systematic process of development and discernment. Rather, I have found out that it is a time – limited event which it is not driven by the strategy and core values of the banks, and it does involve the intentional engagement of all of board members. To be specific, most banks, for instance, grapple with CEO succession when there is a real need to find a CEO.Research has shown that two – thirds of public and private companies in developed countries still struggle to get CEO succession right as they have no formal CEO succession plan in place. This figure is alarming. One – third of the companies which have such a program were satisfied with the outcome. Imagine what would happen to a company when a visionary CEO is gone. Most often innovation dies and the company coasts for years on momentum and its brand. Rarely does it regain its former glory.

A known Ethiopian private bank CEO left their bank because of a dispute with the board chairman over the CEO’s refusal to approve a loan for one of the major shareholders. This bank is now on a downward spiral, and is playing catch up. As I write this article, I have learned that this former CEO is an advisor to a major competitor. The bank he advises is soaring over the crowd.

Succession
It is crystal clear that succession plans matter for the entire organization. It is not just for CEOs. There are plenty below whose absence would have ripple effects throughout the organization. Companies are obliged to put in place a robust succession plan to minimize disruption and capitalize on employee potential. They must be intentional about their succession plan.

A succession plan has a lot of benefits to the organization. On one hand, it sends a positive signal to the entire organization that there is always a room to grow, to move up, and to try new opportunities. Companies who have strong succession plans in place communicate that they are committed to hire and promote from within. One industry study shows that in a company where there is a clear succession plan, 62 pct of employees say it impacts their engagement level positively. On the other hand, succession planning also helps recruit the best employees because they are going to be looking for ways to grow, and at the same time it is a strong retainer for existing employees. The above mentioned points show how important organizational wide succession is with regards to setting up a solid business foundation. This article, however, aims at unpacking what the private banks should do to make CEO succession an ongoing process since the CEO plays such a pivotal role in setting a strategic direction and ensuring success of high – level organizational initiatives .

CEO Succession as a Strategic Imperative
Traditionally, CEO succession planning is typically viewed as one of the board’s least exciting activities. Board of Directors scramble to find a replacement when it is triggered by the abrupt departure of the old CEO rather than through a structured process. This change impacts company culture and can also affect the company’s performance negatively. Successful companies stay ahead of the curve in managing this process with a clear set of processes and milestones. Effective CEO succession requires a well-defined path that ensures a strong pipeline of highly capable candidates ready to assume the CEO position whether through emergency situation or a planned transition.

Ownership rests with the Board
CEO succession is the responsibility of the board of directors. It is true that the incumbent CEO has the responsibility to work hand in hand with the board to make sure that there is a strong leadership pipeline. However, the board should never lose sight of the fact that it must run the show. Boards need to focus on CEO succession on a regular basis, whether they have a brand new CEO or a CEO close to retirement to avoid a loss of momentum that can significantly harm financial performance. The board needs to link the strategic direction of the organization to the CEO succession planning to make sure that the new CEO is going to be right fit for the position. Research has shown that two questions every board should ask when considering a new strategic plan or direction, are, first, “How long do we anticipate our current CEO to remain in the role and what is our plan if he or she should abruptly depart?” And second, “How can we take the surprises out of this process so we have adequate warning to make the changes as seamlessly as possible?” Savvy boards recognize that the leadership style, experience and aptitudes of an individual CEO will influence strategic direction, and they embrace it. Without this awareness, boards may make the mistake of thinking that CEOs are interchangeable parts. Particularly when there are personality clashes, a board may start to think of their CEO as “not the right fit” and act as if “we’ll just find another.”

An ongoing process
CEO succession planning must begin immediately following the installment of a new CEO. The planning must be a constant, ongoing process that is managed as closely and attentively as any of the company’s critical business issues. Thus, it is important to build fast – track programs that deepen leadership development early in employee’s career. The creating of a long – term Executive Development Program through talent review and development and monitoring can significantly increase the internal pool of candidates. It is important that boards need to be less hierarchy – conscious in the way they think about value creation. Thus, they should look at high growth people two or three levels below the CEO for them to have a feel of the organization’s real talent and to recognize their achievements through various platforms. This in turn sends a positive signal to these talented people that there is always room to grow, to move up, and to try new opportunities. I believe that the Head of Human Resources should work closely with the CEO and the board to help identify and build talent and give insight and strategic leadership along this line.

Prepare for emergency CEO succession
An absence of leadership during the abrupt departure of a CEO sends the wrong signal across the board. It indicates poor board governance and has an immediate damaging effect on the company’s market position and share value. Boards never know when they may have to implement an emergency CEO succession plan. For this reason, boards should always be thinking about a succession plan to ensure the continuous coverage of executive duties and safeguards the interests of the company’s stakeholders, reputation and value-creating activities. Sadly, 80 percent of the senior leaders I surveyed claim that they are not prepared for an emergency succession in the event of a sudden, unexpected or unplanned departure of their company’s top leader.

Align Strategy with Profile (Inside / Outside Choice)
The company’s current strategy surely informs the direction boards should take with regards to drawing candidates for CEO from inside or outside the company. The board first evaluate the situation that the company is in , that is , if the company is performing well and the aim is to keep the momentum going , there is a general consensus that an inside candidate is preferred . The outside candidate may be better if the company is not meeting its strategic objectives or if the company’s competitive position in the industry is not meeting the board’s expectations or there is a need to change direction for the future. The recent appointment of an outside CEO for Commercial Bank of Ethiopia is a good example that supports this perspective.

What does the next CEO look like?
The board must reach a consensus on what the right candidate for CEO should look like, that is, her or his skill set, industry knowledge and leadership history. Four principal attributes at the top of any board’s list should be: operational ability, strategic outlook, congruence with the corporate culture, and a high level of social and emotional intelligence. Besides, the evaluation criteria must include the ability to handle key relationships with three “masters” in mind: customers, shareholders, and employees. It is important to look back on the preferred candidate’s track record in dealing with these three key, yet very different stakeholders. While these elements are not directly linked to the selection process, the CEO candidate’s knowledge of them and how to strengthen ties to them should be a primary consideration in the final decision.

CEO succession when planned and executed proactively offers a company far more than just the transitioning of its top leader. It enables organizations to envision new opportunities for growth, and realign and strengthen processes and systems throughout the enterprise.

8th Year • Jan.16 – Feb.15 2019 • No. 70