A Looming Presence

Scenario: The press conference was upbeat, thought lead director Richard Jones as he prepared an e-mail report to his fellow directors. He was communicating with those who weren’t present when current chairman and CEO of State Trust, Ed Packert, announced his retirement and his succession by longtime COO Bill Townsend. The $6 billion regional bank had grown nicely during the last decade, although earnings increases had been modest, due in part to the bank’s aggressive acquisition strategy. Even though Jones believed that Townsend will have an easy transition due to his long tenure at the bank, his thoughts were consumed by Packert’s request to remain on the board after the new chairman and CEO is installed. It could be an awkward situation.

As the board’s lead director, Jones plans to facilitate an executive session of the outside board members to address the issue. Personally, he is searching within himself on whether it is good practice for past CEOs to serve on the board following retirement.

“The Federal Deposit Insurance Corporation does not have an official position on the issue, and we would generally defer to the judgment of the board of directors. That being said, the answer to the question would depend largely on the individual involved and the specific circumstances. On the plus side, retiring chairman and CEO Packert would obviously have a wealth of experience that could prove to be valuable to the institution. Conversely, Packert may have trouble adapting to his new, reduced role as a director and relinquishing his previous leadership role. He may even be an obstructionist to the ideas of the new CEO and could make it difficult for the bank to move in new directions, should the board decide to do so. Board members will have to weigh these pros and cons and consider how Packert will likely adapt, based on their familiarity with him. While the directors may feel compelled to accede to the desires of their retiring colleague out of a sense of allegiance, they must make their decision based on what is in the best interests of the bank’s depositors and shareholders.”

Patrick Rohan

Regional Director

FDIC

Boston, Massachusetts

“The perceived benefits to be gained by allowing Ed to remain as a board memberu00e2u20ac”his experience, the continuity of management he represents, and his goodwillu00e2u20ac”are all far outweighed by the predictable negative consequences that his presence will generate. If the new chairman is a strong, decisive leader, the board risks being fractionalized. A lesser individual will be stifled by the presence of his former boss, and thus will not perform up to his potential.

Personal experience and observation reveal two likely scenarios, which support the above conclusion. First, ideas or policies put forth by the new chairman will more than likely contradict or at least alter existing ones. You can count on the former chairman becoming defensive. The board members are now torn between loyalty to the past chairman and their desire to support their new leader. This divided loyalty not only will lead to fractionalization, but also will divert their attention from the substance of the issues before them. A second likely scenario occurs when the new chairman makes a proposal and one or more directors looks to the other end of the table and remarks, ‘What do you think, Ed?’ This is usually followed by some very uncomfortable moments.

Ed must leave the board! His ego will be fed if, from time to time, he is consulted informally for his valued judgment on a difficult problem. Finally, this entire issue can be avoided by adopting, at the proper time, a policy requiring retirement under these circumstances.”

Richard S. Miller

Director

Valley National Bancorp

Wayne, New Jersey

“It is not a good practice for past CEOs to serve on the board for three reasons. First, a CEO is the designated leader of a team of senior managers responsible for implementing the bank’s strategic plan that was developed and was approved by the board. Once a CEO decides to retire and hands over the leadership baton to his or her successor, it then becomes the new CEO’s team. Since the new CEO reports to the board, as did his or her predecessor, the past CEO who sits on the board becomes part of the supervising team of directors, thus the new CEO will, in effect, continue reporting to the past CEO.

Second, each CEO has his or her own method of working with the board and senior officers. The new CEO should have new and better ways of focusing on results. However, by retaining the past CEO as a board member, there is significant awkwardness when needed changes and improvements are implemented.

Finally, retirement is a time for the past CEO to withdraw from active involvement in the banking business; it is not a time to applaud or defend past activities and practices. The rapidly changing, technologically focused, and sales-oriented banking environment of the future does not have time to reminisce or recall the banking of yesteryear!”

Bob Calvert, CMC, CSP

President

Calvert Consulting

Roswell, Georgia

“As a general rule, it is helpful for any financial institution to have banking experience on its board of directors, particularly in a de novo situation. A former chief executive officer’s knowledge and understanding can be a great asset to a bank board or CEO. However, under these circumstances, with a seasoned directorship in an established and apparently successful bank, this former chairman’s presence will likely create unnecessary tension and stress among board members, including the new CEO.

My regulatory instincts require me to ask: What are his motives for remaining on the board? As a shareholder, does he intend to ‘monitor from the inside’ the value of his holdings? Is he incapable of letting go after all these years? Does he completely trust the new CEO? If he remains a director, will he be able to direct (set policy) rather than manage (day to day) the bank after all these years, or does he just need a reason to come to town once a month?

I would suggest a few board members discuss with the former chairman his interest in remaining a director. This discussion should be held outside the bank, perhaps at a social gathering. The purpose of the discussion is to determine his needs, wants, and desires, then identify ways to satisfy him without his being a board member. If all else fails, remind him of his financial liability as a director!”

E.J. Face Jr.

Commissioner of Financial Institutions

Commonwealth of Virginia

Richmond, Virginia

“I expect to serve on the board following my retirement because I have a big stake in the bank, enjoy the fellowship of the directors, (most of whom I asked to be on the board), and want to make sure that we keep the bank independent. I understand that it will be hard on my successor, but I selected him and he accepted with the understanding that I would stay involved. My predecessor served on the board and I survived, so why should I feel otherwise? I’m confident that this arrangement will produce the same stellar results that we have enjoyed over the last 10 years.

Throughout my career I have been told that things should be done this way or that way to run a successful, high-performance bank. I’m convinced that there is no standard blueprint for all banks and that each situation, board, and management is unique. Ultimately, if it looks like my presence on the board is hurting the bank, I won’t hesitate to resign. I guess time will tell!”

Name Withheld Upon Request

“When the previous CEO retires, he or she should not continue as a board member. The other directors, many of whom may owe their positions on the board to the outgoing CEO, will continue to think of that person in the role of primary, full-time manager. They will not be able to easily ‘transfer’ the former CEO to a position as a director, which is, in almost every case, a part-time job.

Beyond the interaction among directors, the officers and employees will have a hard time accepting the new CEO if the past CEO remains too visible. Those officers who regularly sit in on board meetings might find themselves between a rock and a hard place if the new boss and the old boss disagree about a particular issue. Directors or employees might interpret the introduction of new policies or products as a refutation of the former CEO’s policies. If, in State Trust’s case, Ed is still around, necessary changes might be delayed, or never made. If the new CEO is the right choice, let him or her operate without the restraining presence of the predecessor.”

Mortimer J. O’Shea

Former Chairman and CEO

The Ramapo Bank

Wayne, New Jersey

President and CEO

Hilltop Community Bank (in organization)

Summit, New Jersey

“The board of directors of State Trust is on the horns of a dilemma. Ed Packert, the retiring chairman and CEO, has made a request to serve on the board. On the one hand, his experience during his partially successful tenure could be beneficial to the bank going forward. On the other hand, his continuing role on the board may impede the new CEO in making important changes to increase earnings and shareholder value. After all, the new CEO served under Packert and may continue to defer to the retiring CEO based on the former relationship. Similarly, board members may continue to defer to Packert who, as chairman, headed the board and may have played a key role in the election of some of the directors.

While the experience, perspective, and know-how of a former CEO can be valuable assets, leadership transitions can be difficult and potentially destructive. How can the bank best utilize Packert without the risk of interference with the efforts of the new CEO and the board?

Consideration should be given to a formal or informal consulting role, instead of a director seat, assuming that the board and the new CEO believe that Packert will provide beneficial insight and advice to the bank. In that way, the new CEO can call on his predecessor on his own initiative and avoid the complications of having his former boss actively participate in all major corporate decisions as a board member. It is essential that the board not make a decision on Packert’s future role without the full participation of the new CEO.”

David Baris

Partner

Kennedy, Baris & Lundy, L.L.P.

General Counsel

American Association of Bank Directors

Bethesda, Maryland