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Bank directors can get so bogged down with their day to day tasks that they neglect to prepare for CEO and leadership succession.  Complacency can be costly, as when there is no solid plan in place boards are more likely to hire a CEO from the outside.

A study by Booz & Co. done last year shows that the return on investment of this option isn’t favorable to shareholders over the long term; the median to shareholders by insider CEOs over the past dozen years was 3.9%, compared with 0.65% by outsiders.

Not only are transition costs substantial, but no plan creates unnecessary turnover.  When CEO transitions occur, top executives who wanted the job frequently leave the company.  Although some level of turnover is expected and natural in the course of a leadership change, failed successions leave unnecessary turnover in their wake.

Preparation involves proactive movement of executives into key roles, real-time knowledge of the external market and high-intensity development of potential successors.

Here are five keys to success:

1.      Know what you need tomorrow, not just what’s available now. Make moves that position leaders to learn the skills necessary in the future.

2.      Experience matters.  Don’t just ask, “How long until they are ready?” Also ask, “What specific experiences are internal candidates being given to prepare them for a job they’ve never done before?” They also need exposure to tough constituents and will benefit from real-world experience presenting to analysts, investors, the board, unions and employees.

3.      Know the external market.  Convergence in many industries means that the board should be tracking executives in other industries, not just their own.  Many banks are under pressure to innovate and they may need dip into other talent pools in order to find the right person.

4.      Firsthand knowledge beats talent reports every time.  When considering internal candidates, Directors should have personal, direct knowledge of their likely successor.

5.      Don’t fear the horse race.  Former General Electric CEO, Jack Welch, is perhaps the best known proponent of setting up the “horse race,” but he did so with an extraordinary amount of interaction between the candidates and the board.

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