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Stanley V. RagalevskyyKirkpatrick & Lockhart Preston Gates Ellis LLP

State Street Financial CenterOne Lincoln Street

Boston, MA 02111-295 0617 .951 .9203

stan .ragalevsky@klgates .co m

K&L I GATES wkj,f,ft i,ck & I : 0 l dil i`'i,ustprr (,, e E If s rr ,

What is Boa rd Succession Planning ?

■ Effective board succession planning is not simplyfilling a di rector vacancy when one occur s

■ An ongoing, systematic process to ensure boardcontinuity and quality through :

■ Identification of the competencies and qualitiesexpected of directors

■ Assessment of existing board to identify gaps indesired skills which are presently lacking or may belost in the future

K li' 1, jàti t f'f Y & ~.. ;1r, k h l r : 11 v (`s, 1.o a Gla1 I , y 1 .1 ~&L I GATE S

What is Board Succession Planning ?

■ Improvement and Development of the skills andcapabilities of existing directors through a process ofeducation, training, mentoring and coachin g

■ Recruitment of new directors who will satisfy thedesired competencies and qualitie s

■ Development and integration of new directors intoboard through education and training

K&L I GATE S

What is Boa rd Success ion Planning ?

■ An integral part of a bank's governance process■ Controlled by the Board, not the CE O■ Tied to the bank's mission and strategic plan

■ Good board succession planning rarely just"happens" but is a product of the directors'collective commitment to thoughtful planning andwillingness to hold themselves accountable

K&L I GATES or'O r 1',~ 1*F~ C t CI, ;i f

Board Succession Planning - A Challenge for theBoard

■ Board succession planning is a difficult issue forboards to address

■ Only 1/3 of Fortune 1000 companies engage in boardsuccession planning

■ Discomfort over establishing standards andevaluating current board members against them

■ Peer to peer evaluations are more stressfu l■ Board entrenchment

L I GATES

K irkp{ tn r~ k & I_o h,dri I

Board Succession Planning - A Challenge for theBoard

■ Things are changing - fas t■ Corporate scandals ratcheting up expectations for

directors■ Sarbanes-Oxley Act and NYSE listing standards

require public companies to conduct periodic boardself-evaluation s

■ SEC rules require public companies to disclose theprocess used to identify and evaluate boardnominees

■ Knowledge explosion and "best practices" makingcorporate governance "process" driven

K&L I GATES & 1-ockfum 11

Board Succession Planning Has Become a GoodGovernance Best Practice for Banks

■ It is the right thing to d o■ As a director, you have an obligation to leave your

bank in better condition than you found it and toassure its continuity

■ You cannot fulfill that obligation if you make noprovision for your replacement

K& L I GAT ES

II' k p a,I r + k & ! oOurt

tc { ; (iat'?S E i rs il .

The " B lowback" Effect

■ Once a board defines the qualities and skills itwants from prospective directors, it cannot logicallyexempt its present directors from those standard s

■ Evaluation of current directors is inextricably tied toa board's succession planning effo rts forprospective directors .

■ Plugging gaps in the board through a successionplanning process should also get the board focusedon improving present performance

K&L I GATES x$, I ..cit;k s lml

G,Rt es His !.1 .1,

The "Blowback" Effect

■ There is a correlat i on between boards thateffectively plan for their own succession and goodgovernance . Boards at well governed banks tend tohave effective board succession functions becausethey already have :

■ Board governance principles

■ Board committee charters■ Effective strategic plannin g

■ Effective management succession planning

K&L I GATE S

Indicators of a Need for Board Succession Plannin g

■ If your instincts tell you that your bank has aproblem with how i t selects and recruits directors,your instincts are probably righ t

■ Your board may need to pay more attention toboard succession if too many of the following aretrue :

■ Your bank has no job description outlining thequalifications and responsibilities of director s

■ No new directors elected to board in past five years

K &L I GATE

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■ 40% or more of directors have retired or plan to retirefrom their primary occupations within the next fouryears

■ Directors at your bank generally serve until they dieor become incapacitate d

■ Your bank does not annually assess theeffectiveness of the board and its member s

■ Your board neither provides nor requires directors topartake in continuing education or training on bankingissues

K&L I GATES ,h]P<at n r k, ,.


■ Your bank has a "3" or worse rating for themanagement component in its most recent safetyand soundness examinatio n

■ Your board does not have a a chair who providesstrong leadershi p

■ Your board does not have meaningful successionplanning and development for its CEO and seniorofficers

K&L I GATE S


■ Board succession planning takes real discipline andcommitment

■ Peer to peer evaluations are often dreade d■ The imposition of accountability can be disquieting

• Unpopular with least productive directors

■ Easy for top tier decision makers to exceptthemselves

■ Damage from ineffective board succession planningnot visible for years

I: Ifis

tL I GATE .

Getting Started - Preliminary GovernanceConsiderations

■ There are many governance issues which a boardshould consider before initiating a board successionplanning process . The most important are :

■ Deciding who will oversee the board successionprocess (e .g ., the Chairman, the GovernanceCommittee or the full Board )

■ Legal restrictions on the size of the board or thenumber of committees which need to be staffe d

■ The geographic and other constituencies which theboard has decided merit representation

K&L I GATE S


■ The impact of laws or by-law provisions mandating aretirement age or term limits

■ Any requirement that directors satisfy an"independence" standard for board eligibility (e .g .,does the bank have a policy that sitting directors whoretire from their jobs or professions, former CEOs ofthe bank, relatives or close friends of directors,vendors providing services to the bank, loancustomers or bank officers are not "independent" andtherefore are disqualified from serving as directors)

KuL I GATE S


■ The existence of an advisory committee whichdevelops prospective directors or serves as atransition point for recently retired director s

■ The impact of board retirement benefit programs■ These considerations can impact how much

flexibility the bank will have to deal with the boardsuccession planning process

K&L I GATES tcjck h

The Board Succession Planning Proces s

■ An overview of the Board Succession Process :■ Define the qualifications for being a directo r■ Conduct a board and/or director self assessment■ Create a board skills matrix

■ Compare matrix against Bank's strategic plan andmission to identify gaps in desired skills or attributesamong board members

K&L I GATE S


■ Develop plans to improve the performance and skillsof current directors who need further education andexperience

■ Identify and recruit potential director candidates■ Integrate new directors by training, mentoring and

educatio n■ Rotate directors through committees when possible

to develop experienced directors■ Monitor and update the process at least annually

K&L I GATE S

The Board Success ion Planning Proce ss

■ Strong, effective leadership and commitment isnecessary

■ Governance committe e■ Effective Chairman of the Board

K&L I GATES I_o , k hl l

The Board Succession P lanning Process

■ Step 1 . Define the qualifications for being a director■ Position description essentia l

■ Commitment to mission and strategic objectives■ Primary rol e

■ Duties and responsibilitie s

■ Personal characteristics (e .g ., integrity, good judgment, highstandards)

■ Core competencies

Hip 1 F


■ Too many boards fail to define these criteria■ Raises the expectations for existing directors

■ Step 2 . Conduct a board and/or director selfassessment

■ Can take several form s■ General questionnaire about board effectiveness■ Individual director self evaluation s■ Director peer evaluations about each other

K&L I GATE S


■ Who sees the completed forms■ Entire board (Yes, summary only )■ Chairman/Committee (Yes, self-evaluation )■ Directors being evaluated (No, report to Chair)

■ Facilitator (Yes, peer evaluations)

■ Evaluation forms - draw them carefull y■ Don't go too fast - promote consensus, not division■ Have policy on destruction of completed forms . No

email

K&L I GATES U l i

The Board Succession Planning Process

■ As part of self-assessment process, conduct anassessment of the Chairman and his/her leadershipof the Board

■ Step 3 . Prepare a matrix summarizing eachdirector's skills and contribution based upon selfassessments and other relevant information . Seeform .

K&L I GATE S

The Board Success ion Planning Process

■ Step 4 . Identify gaps or areas where the boardneeds improvement or where replacements will beneeded

■ Identify skills, competencies or other traits notpossessed by present board members (e .g .,financial/accounting expert, lending expertise,resident of an unrepresented community )

■ Identify any other skills needed to support the Bank'sstrategic plans for the future (e .g ., expertise ininformation technology or payment systems)

& L I GAT E

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■ Identify areas for improvement of existing directors,develop action plans to address improvement areasand monitor the progress of those plan s

■ Assignment to audit committe e

■ Rotation of members through committees

■ Mentoring by senior board members

■ Education programs

&L I GATE S


■ Identify situations where present board members willbe or should be retirin g

■ Age limits

■ Problem behavio r

■ Step 5 . Recruitment and transition planning to fillvacancies with best available candidates .

■ Recruiting new directors

L i SATES 131,vS,Io11 C1, a(t ,s I IIi S, l! ('


■ Compile short list of outstanding candidates updatedperiodically with needed skills identified in strategic plan orneeds assessment process. Jaundiced eye toward cronies,friends and relatives . Only the "best people . "

■ Consider use of advisory committee as a "farm team" fordirector development

■ Due diligence process• Financial stabilit y• Absence of black marks (bankruptcy, criminal record )• Absence of disqualifying factors like blood relationships or

unusually close affiliations with other directors

LI GATE S


■ Reputation and standin g• Interagency biographical form

■ Formal orientation and mentoring program for new directors

■ Transitioning existing directors• Be sympathetic, recognize contributions• Be sensitive to financial strain s■ Director fee continuation plan s■ Create a modest, continuing role or status

Goodwill ambassadoro Advisory committee

Honorary / emeritus director

Carefully define parameters

& L i GATE S

The Board Success ion Planning Process

■ Step 6 . Support candidacy of selected candidatesby integrating board succession planning effortswith nominating proces s

■ Step 7 . Repeat the process every year

L I GATES

K i i k1 .atr r: AU I ric;k h ar, Pi,o,s1, si Cl i f s E i Es' E ~

Four Important Director Succession Issue s

■ The board needs a strong chairma n

■ Leadership by an effective chairman is a criticalelement of a successful director planning functio n

■ Strong leadership by a Chairman of integrity and stature isnecessary to drive the director self-assessment andimprovement process

■ Chairman should :• Set the agenda and tone for effective board functioning

K&L I GATE S


• Make sure strategic issues are discussed adequatel y■ Assure that individual directors are developed to their potential• Promote effective relationships among board members and

management• Ensure that the performance of the board and individual

directors is assessed annually• Assure that the board is engaged and accountable• Promote trust, teamwork and communicatio n• Ensure board decisions are implemented• Provide coherent leadership

1, h PrL i GATE S


■ It is important for the board to review and assess thequality of leadership provided by the Chairman whenassessments of board members are performe d

■ Rotation of the Chairman's position may beappropriate in certain situations

K&L I GATES F r

Four Important Director Succession I ssues

■ Mutuals have unique board succession planningissues

■ Director support and belief in mutual form mostimportant defense to preserve mutualit y

■ Stress history, mission and purpose of mutual ban k■ Recruit only those who appreciate and are willing to support

the continuation of the mutual charte r

■ Directors of mutuals have no one looking over theirshoulders to encourage or prompt effective boardsuccession plannin g

• Greater accountability and self discipline required

K&L I GAT E S 10r,k hI 1rY Plf,estf}Ir G ,at : 1 1 11 S- il k

Four Important Director Succession Issues

■ Mandatory retirement ages■ Third rail of board governance issue s

■ Tendency today is to have mandatory retirement age(72-75) in the By-Laws

■ Age discrimination laws inapplicable to directors

• Exemptions for incumbent directors commo n

• Waivers for no more than one director

K&L I GATE S

.Four Important Director Succession Issue s

■ Difficult issue - money, pride, loyalty■ Balanced approach needed■ Be fair to the bank and the directors but the best interest of

the bank comes firs t■ The best interest of the bank requires :

■ A board where every director uniformly satisfies a highperformance standardDirectors who are the best people in the community

■ Periodic turnover on the board to continue to attract the best ofthe current generation and make room for them

K& L I GATES

Y


■ A balanced board with a fair mix of director s

■ Service on a bank board is a serious responsibility, not anhonor

■ Workable solution on retirement age issuesMandatory retirement age

■ Allow directors to stay on only as long as they fully satisfy theuniform performance standards expected of every otherdirecto r

■ This may be hard to enforce■ Allow no more than one waiver from any mandatory retirementage

K&L I GATE S

Four Important Director, Succession Issue s

• Have a transition pla n

Address financial issues by director retirement or feecontinuation pla n

Address loyalty and dignity issues by director emeritus or goodwillambassador statu s

• Avoid "termination" perceptio n

• Board focus to be oriented to deal with tomorrow's strategicissues

L I GATE S

, : .

Dealing with Ineffective Directors

■ Directors can be ineffective for many reasons (e .g .,lazy, uninterested, diminished capacity, distrusted)

■ The single best way to get them off the board■ Make them work hard -real hard!■ Raise the bar for all directors■ No exceptions, no "gentleman's C"

Iir HIS LIPK&L I GATE S

Conclusion

■ More community bank boards today are realizin g■ Not having an effective board succession planning function puts

the bank at greater risk■ Having continuity of leadership at the board level is importan t■ Having a vibrant board representative of the best people in your

community can give your bank a sustainable competitiveadvantage

■ A bank which develops an outstanding board through effectiveboard succession planning will be more likely to survive today'sdifficult competitive environment

BOS-1136432-0

Documents

K&L I TES€¦ · K&L I GATES wkj,f,ft i,ck & I : 0l dil i`'i,ustprr (,, e E If s rr, What is Board Succession Planning? Effective board succession planning is not simply filling