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Ragalevskyy Kirkpatrick & Lockhart Preston Gates Ellis LL P State Street Financial Center One Lincoln Street Boston, MA 02111-295 0 617 .951 .9203 s tan .ragalevsky@klgates .co m K&L I GATES wkj,f,ft i,ck & I : 0l dil i`'i,ustprr (,, e What is Boa r d Succe ssion Planning ? ■ Effective board succession planning is not simply filling a di rector vacancy when one occur s ■ An ongoing, systematic process to ensure board continuity and quality through : ■ Identification of the competencies and qualities expected of director s ■ Assessment of existing board to identify gaps in desired skills which are presently lacking or may be lost in the future E If s rr , &L I GATE S K li' 1,j`ati t f'f Y & ~. ;1r, k h l r: 11v (`s,1.o a Gla1 I , y 1 .1 ~ What is Board Succession Planning ? ■ Improvement and Development of the skills and capabilities of existing directors through a process of education, training, mentoring and coachin g ■ Recruitment of new directors who will satisfy the desired competencies and qualitie s ■ Development and integration of new directors into board through education and training K&L I GATE S What is Boa rd Succe ss 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 and willingness 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 the Board ■ Board succession planning is a difficult issue for boards to address ■ Only 1/3 of Fortune 1000 companies engage in board succession planning ■ Discomfort over establishing standards and evaluating 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 the Board ■ 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 board self-evaluation s ■ SEC rules require public companies to disclose the process used to identify and evaluate board nominees ■ Knowledge explosion and "best practices" making corporate governance "process" driven K&L I GATES & 1-ockfum 11 Board Succession Planning Has Become a Good Governance Best Practice for Bank s ■ 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 to assure its continuity ■ You cannot fulfill that obligation if you make no provision for your replacement K& L GAT ES I II' k p a,I r + k & ! oO urt tc {; (iat'?S E i rs il . The " B low b ack" Effect ■ Once a board defines the qualities and skills it wants from prospective directors, it cannot logically exempt its present directors from those standard s ■ Evaluation of current directors is inextricably tied to a board's succession planning effo rt s for prospective directors . ■ Plugging gaps in the board through a succession planning process should also get the board focused on improving present performance K&L I GATES x$, I ..cit; k s lml G,Rt es His !.1 .1 The "Blowba c k" E ffect ■ There is a correlat i on between boards that effectively plan for their own succession and good governance . Boards at well governed banks tend to have effective board succession functions because they already have : ■ Board governance principles ■ Board committee charters ■ Effective strategic plannin g ■ Effective management succession planning , K&L I G ATE S Indicators of a Need for Board Succession Plannin g ■ If your instincts tell you that your bank has a problem with how i t selects and recruits directors, your instincts are probably righ t ■ Your board may need to pay more attention to board succession if too many of the following are true : ■ Your bank has no job description outlining the qualifications and responsibilities of director s ■ No new directors elected to board in past five years K &L I GATE , ~, k4i: k hd j,t 1 re s, ;cm Gatos € 1 Indicators of a Need for Board Succession Plannin g ■ 40% or more of directors have retired or plan to retire from their primary occupations within the next four years ■ Directors at your bank generally serve until they die or become incapacitate d ■ Your bank does not annually assess the effectiveness of the board and its member s ■ Your board neither provides nor requires directors to partake in continuing education or training on banking issues K&L I G ATES ,h]P<at n r k, ,. Indicators of a Need for Board Succession Plannin g ■ Your bank has a "3" or worse rating for the management component in its most recent safety and soundness examinatio n ■ Your board does not have a a chair who provides strong leadershi p ■ Your board does not have meaningful succession planning and development for its CEO and senior officers K&L I GATE S Indicators of a Need for Board Succession Plannin g ■ Board succession planning takes real discipline and commitment ■ 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 except themselve s ■ Damage from ineffective board succession planning not visible for years L I GATE . I: Ifis t Getting Started - Preliminary Governance Consideration s ■ There are many governance issues which a board should consider before initiating a board succession planning process . The most important are : ■ Deciding who will oversee the board succession process (e .g ., the Chairman, the Governance Committee or the full Board ) ■ Legal restrictions on the size of the board or the number of committees which need to be staffe d ■ The geographic and other constituencies which the board has decided merit representation K&L I GATE S Getting Started - Preliminary Governance Consideration s ■ The impact of laws or by-law provisions mandating a retirement 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 who retire from their jobs or professions, former CEOs of the bank, relatives or close friends of directors, vendors providing services to the bank, loan customers or bank officers are not "independent" and therefore are disqualified from serving as directors) KuL I GATE S Getting Started - Preliminary Governance Consideration s ■ The existence of an advisory committee which develops prospective directors or serves as a transition 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 board succession planning process K&L I GATES tcjckh 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 matri x ■ Compare matrix against Bank's strategic plan and mission to identify gaps in desired skills or attributes among board members K&L I GATE S The Board Succession Planning Proces s ■ Develop plans to improve the performance and skills of current directors who need further education and experience ■ Identify and recruit potential director candidate s ■ Integrate new directors by training, mentoring and educatio n ■ Rotate directors through committees when possible to develop experienced director s ■ Monitor and update the process at least annually K&L I GATE S The Board Succe ss ion Planning Proce ss ■ Strong, effective leadership and commitment is necessary ■ Governance committe e ■ Effective Chairman of the Board K&L I GATES I_o , k hl l The B oard Succession P lanning Proces s ■ 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, high standards ) ■ Core competencies Hip 1 F The Board Succession Planning Proces s ■ Too many boards fail to define these criteria ■ Raises the expectations for existing director s ■ Step 2 . Conduct a board and/or director self assessmen t ■ 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 The Board Succession Planning Proces 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 The B oard Succession Planning Process ■ As part of self-assessment process, conduct an assessment of the Chairman and his/her leadership of the Board ■ Step 3 . Prepare a matrix summarizing each director's skills and contribution based upon self assessments and other relevant information . See form . li K&L I GATE S The Board Success ion Planning Proce ss ■ Step 4 . Identify gaps or areas where the board needs improvement or where replacements will be needed ■ Identify skills, competencies or other traits not possessed 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's strategic plans for the future (e .g ., expertise in information technology or payment systems) & L I GAT E irkj, Ri t! a k &, 1 o(,kht i k' Fr s1 (, 3 ~t ~ E HIS t The Board Succession Planning Proces s ■ Identify areas for improvement of existing directors, develop action plans to address improvement areas and monitor the progress of those plan s ■ Assignment to audit committe e ■ Rotation of members through committees ■ Mentoring by senior board member s ■ Education programs &L I GATE S The Board Succession Planning Proces s ■ Identify situations where present board members will be or should be retirin g ■ Age limits ■ Problem behavio r ■ Step 5 . Recruitment and transition planning to fill vacancies with best available candidates . ■ Recruiting new directors L i SATES 131,vS,Io11 C1, a(t ,s I IIi S, The Board Succession Planning Proces s ■ Compile short list of outstanding candidates updated periodically with needed skills identified in strategic plan or needs assessment process . Jaundiced eye toward cronies, friends and relatives . Only the "best people . " ■ Consider use of advisory committee as a "farm team" for director 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 l! (' LI GATE S The Board Succession Planning Proces s ■ Reputation and standin g • Interagency biographical form ■ Formal orientation and mentoring program for new directors ■ Transitioning existing director s • Be sympathetic, recognize contributions • Be sensitive to financial strain s ■ Director fee continuation plan s ■ Create a modest, continuing role or status Goodwill ambassador o Advisory committee Honorary / emeritus director Carefully define parameters & L i GATE S The Board Succe ss ion Planning Proce ss ■ Step 6 . Support candidacy of selected candidates by integrating board succession planning efforts with 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 Four Important Director Succession Issue s ■ The board needs a strong chairma n ■ Leadership by an effective chairman is a critical element of a successful director planning functio n ■ Strong leadership by a Chairman of integrity and stature is necessary to drive the director self-assessment and improvement process ■ Chairman should : • Set the agenda and tone for effective board functioning E i Es' E ~ K&L I GATE S Four Important Director Succession Issue 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 annuall y • Assure that the board is engaged and accountable • Promote trust, teamwork and communicatio n • Ensure board decisions are implemented • Provide coherent leadership L i GATE S 1, h Pr Four Important Director Succession Issue s ■ It is important for the board to review and assess the quality of leadership provided by the Chairman when assessments of board members are performe d ■ Rotation of the Chairman's position may be appropriate in certain situations K&L I GATES Fr Four Important Director Succession I ssues ■ Mutuals have unique board succession planning issue s ■ Director support and belief in mutual form most important 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 their shoulders to encourage or prompt effective board succession 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 Issue s ■ Mandatory retirement age s ■ 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 high performance standard Directors who are the best people in the communit y ■ Periodic turnover on the board to continue to attract the best of the current generation and make room for them K& L I GATES Y Four Important Director Succession Issue s ■ A balanced board with a fair mix of director s ■ Service on a bank board is a serious responsibility, not an honor ■ Workable solution on retirement age issues Mandatory retirement ag e ■ Allow directors to stay on only as long as they fully satisfy the uniform performance standards expected of every other directo r ■ This may be hard to enforc e ■ Allow no more than one waiver from any mandatory retiremen t age K&L I GATE S Four Important Director, Succession Issue s • Have a transition pla n Address financial issues by director retirement or fee continuation pla n Address loyalty and dignity issues by director emeritus or goodwill ambassador statu s • Avoid "termination" perceptio n • Board focus to be oriented to deal with tomorrow's strategic issues L I GATE S ,:. Dealing with Ineffective Director s ■ Directors can be ineffective for many reasons (e .g ., lazy, uninterested, diminished capacity, distrusted) ■ The single best way to get them off the boar d ■ Make them work hard -real hard! ■ Raise the bar for all director s ■ No exceptions, no "gentleman's C" K&L I GATE S Iir HIS LIP 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 competitive advantag e ■ A bank which develops an outstanding board through effective board succession planning will be more likely to survive today's difficult competitive environmen t BOS-1136432-0