Why family succession planning comes down to communication

Illustrations by Naomi Wilkinson

Family ownership is a hallmark of many long-running community banks, but leaders must navigate the often delicate matters of succession and board planning with loved ones. Establishing responsible corporate governance and knowing how to deal with awkward conversations can help growth-oriented banks manage family issues effectively.

By Kathryn Jackson Fallon

Managing a board of directors is crucial for any community bank, but even moreso for a family-owned bank. With relatives on the board, things can get thorny fast if little or no planning is done. After all, it isn’t just about business. It’s also about family.

Philip Smith, president of Gerrish Smith Tuck Consultants and Attorneys in Memphis, Tenn., says the best way to keep banking and family issues independent (although complete separation is impossible) is to have a concrete board succession and management plan firmly in place. “Before there is a need is when you need to plan for that,” he says. “And it’s always easier for the boards to discuss those issues when they’re not dealing with the actual issue. They can discuss it in the abstract before the need arises.” Smith believes boards should think of succession planning as a part of their corporate governance.

He often encounters scenarios such as this example: There is a planned family succession for a community bank’s CEO role. When the current CEO retires, they stay on as a board member. The other family member is then promoted to the CEO role, but the person overseeing this new CEO, along with the entire board, is the same family member who’s now on the board. Every time the new CEO wants to do something new, the retired CEO counters, saying it should be done the way they used to do it. “That sometimes works terribly, as you might expect,” Smith says.

Joseph Cady, managing partner of CS Consulting Group in Lake Arrowhead, Calif., says a lot depends on the dynamic of ownership and the percentage that’s held by family. Even with families that have majority control, there are some important nuances. First, the family must figure out its own goals for the direction of the bank. Second, it must hold strategy sessions with the board to determine how to achieve those goals.

Randy Compton of $501 million-asset Pioneer Trust Bank, N.A. in Salem, Ore., has a twin brother, Mike Compton, and son, Brad Compton. Brad is an officer at the bank and both brothers are CEOs and board co-chairs; Mike is CEO of Pioneer Trust Bank’s trust department and investments, while Randy is CEO of the bank itself. Randy says they agree that effective succession planning must address who’s going to be next in line and how they plan to pass leadership from generation to generation.

“It takes a long time, I think, for a board member to really get up to speed and really understand things. We’re constantly working with them, and that’s part of the process you have to go through.”
—Randy Compton, Pioneer Trust Bank, N.A.

The Comptons’ strategy is to have representatives from each family on the board who are part of the planning process. Randy says there is a steep learning curve. “It takes a long time, I think, for a board member to really get up to speed and really understand things,” he says. “We’re constantly working with them, and that’s part of the process you have to go through.”

How to have the awkward conversation

Timing and communication are key to successfully transitioning a family member on or off the board. “It can be tricky with family,” says ICBA chairman-elect Noah Wilcox, CEO and chairman of $100 million-asset Minnesota Lakes Bank in Delano, Minn.; and president, CEO and chairman of $235 million-asset Grand Rapids State Bank and its holding company, Wilcox Bancshares Inc., in Grand Rapids, Minn.

“When you’re family … I think there’s oftentimes a sense of entitlement to a seat on the board just because of the ownership issue.”
—Noah Wilcox, Minnesota Lakes Bank and Grand Rapids State Bank

He says that when Grand Rapids State Bank’s board rotated his grandfather off years ago, they let him know that in a couple of years, they might want to move him to an emeritus position for a year or two and then have him no longer attend meetings. “It took a couple of years of having dialogue,” says Wilcox, “because when you’re family, and especially when you’re family and have ownership, I think there’s oftentimes a sense of entitlement to a seat on the board just because of the ownership issue.”

Wilcox is starting the dialogue right now with his father. “He’s only 70 years old, but he’s been retired from the business for a number of years,” he says.

He had tried being blunt, telling his father, “Well, now that you’re moving your residency to Arizona, maybe now is the time to resign from the board,” but his father’s reaction was not what Wilcox expected. “He looked at me like I was from Mars.”

Wilcox realized then that he would have to take a gentler approach and let it play out more naturally.

Wilcox also believes planning for a transition comes down to communication and clear expectations. “I tell our directors at our annual meeting in January every year, ‘It’s a one-year appointment. You don’t have a board seat for life,’” he says.

Smith says that with a family bank, the issues aren’t as straightforward as they are in nonfamily businesses. You have to consider that it’s Uncle Bob or Grandma Patty on the board. “Those [situations] carry some unique concerns, because you’re trying to balance the benefit of the bank with what everybody’s going to be doing at Thanksgiving,” Smith says.

Having that awkward conversation

In preparing for a delicate, but necessary, talk with a family member about succession planning, choose the right words and pick the right setting. If you need to have a discussion with an aging director who’s a family member, or a family member who you feel is no longer a good fit for your bank’s strategic direction, have a formal sit-down meeting. “Don’t do it at the dinner table or over Thanksgiving,” says Philip Smith, president of Gerrish Smith Tuck Consultants and Attorneys.

It’s all about how you couch the message, advises David Bork of Family Business Matters. Have a quiet, constructive conversation with the person, and present a series of alternatives, letting them know they’ve had a good run and it might be time to pursue other opportunities.

For example, “You know, we really need to bring some new people in to take the bank in a more successful direction. How would you feel about ending your term?” This makes it a choice rather than a directive. It might even come as a relief to the person.

Joseph Cady, managing partner of CS Consulting Group, believes that staying on top of board peer reviews ensures you’re identifying each board member’s strengths and weaknesses on a regular basis. You’re counseling all the board members, he says, and everyone’s being treated equally. It also gives you a chance to have delicate conversations before things get even more awkward.

Preparing for transition

The tricky thing with succession at family-owned banks is the board must plan around the major events of family life.

Scott Beeley is president and CEO of $172 million-asset Bank of Terrell in Dawson, Ga., and his wife, Lucie Beeley, is chairman of the board and president of the holding company. Scott believes it’s never too early to start communicating about transition. The bank and its holding company were in Lucie’s family, and she stepped into the leadership role when her father retired as chairman in 2012.

He admits the board didn’t do a good job of contingency planning for the transition between Lucie and her father, and that more conversation and transparency would have made the transition easier.

“If we had to do it over again, we may have considered a third-party consulting group,” he adds.

Successors may not always be ready to transition to leadership. Smith says he sees more and more cases of community banks that have aging family members at the helm but where the next family member to come up is perceived as too young or inexperienced to lead the organization. In that case, leadership often chooses to bring in an outside person for the role.

“There’s nothing wrong with having a third party, an outside person [or] a nonfamily member manage and run the bank, with a family member training under that outside person,” Smith adds.

In fact, family banks often have tunnel vision on management style and direction, so occasionally breaking that cycle of family leadership, even for a short time, may allow for a fresh perspective. “Interestingly enough, that may perpetuate the family ownership well into the future by at least having some gap in there,” Smith says.

Smith notes that with family banks in particular, there is a mindset of there being a finite number of board “slots,” but he says it’s possible to add a board member if you have a succession goal in mind, and if your state and organization’s laws permit it.

David Bork, a consultant at family business consultancy Family Business Matters in Carbondale, Colo., concurs. He says one way to defuse a situation where you feel obliged to let or keep a family member on the board could be to add another board member, which diffuses the relative’s contribution.

Compton says that members of his bank’s board automatically retire in the year when they reach 70, though this age can be adjusted on an individual basis. Pioneer Trust’s board tries to make sure that the retiree is given the option of being on a board, regardless if they’re family.

Bork emphasizes the importance of establishing a time frame and term limits. “Suppose you have a person that’s served out their term,” he says. “What you can do is graciously thank them for their service and really appreciate their insights and honor them for what they have done.”

Wilcox is upfront about board terms. His board tells potential directors that the term is one year, but they could end up serving a number of years if they are able. “But at some point, that’s going to come to an end,” Wilcox says.

He is the majority shareholder of Wilcox Bancshares Inc., his banks’ holding company, and he knows there will come a time when it’s right for him to leave. He adds: “I don’t know how I’m going to feel about it, but the reality is, that’s what’s going to happen at some point.”

Making professional barriers

For any family business, keeping work issues from intruding into family time isn’t always easy. Wilcox recalls a fishing trip he and his dad went on two years ago.

“When we got in the car to drive to Canada, I said, ‘This is a family trip. I don’t want to talk about the bank until we’re back at work. Not one word.’ Everybody agreed, and we did not talk shop for 10 days, which was amazing.”

Wilcox says there were some business issues going on at the time, and he didn’t want to ruin the vacation, but it’s not always easy to avoid shop talk. “I think family dynamics are very interesting,” he says. “I mean, there are good times and there are challenging times. I think as long as people can maintain the fact that business is business and family is family, everybody generally comes out feeling OK about it.”

How to prepare a young relative for future leadership

It’s important not to give customers or anyone in the bank reason to think that a relative got their position just because they’re part of the family. They should earn it on their own merit, says Joseph Cady, managing partner of CS Consulting Group.

Philip Smith, president of Gerrish Smith Tuck Consultants and Attorneys, advises that even in a family bank situation, there should be a formal nomination committee comprised of both family members and outside directors. This ensures a fair evaluation that determines whether this person, regardless of their name, is or is not the right candidate.

Having a child come back and work for the bank can be a blessing. Family banks are often in small towns or rural areas, which can pose challenges when trying to recruit younger people. To better prepare family up-and-comers, Smith says, they should study at a good banking school, attend industry conferences, get involved in their state association and immerse themselves in the bank from the ground up.

Noah Wilcox, CEO and chairman of Minnesota Lakes Bank in Delano, Minn.; president, CEO and chairman of Grand Rapids State Bank in Grand Rapids, Minn., and ICBA chairman-elect, recommends not pressuring a younger family member into joining the bank.

When Wilcox graduated college, his dad hounded him to come back to the family business, but he chose not to. He didn’t know at that point if he wanted to be in banking, he says.

Wilcox eventually did choose that path, and he loves it, but he adds: “I don’t know that I would be in the position I’m in right now if I would have come back to work right out of college like my father wanted.”

4 infamous family business conflicts

Disagreements in family businesses are nothing new.
Most, however, end more amiably than these examples.

1. Gucci: Years of family disagreements and legal battles over control of the luxury fashion brand resulted in the family name being raked over the coals—and the conviction of Patrizia Reggiani for the murder of her ex-husband, Maurizio Gucci, in 1995. During one of many trials, a close associate said that the alliances in the family seemed to change every five minutes.

2. McCain Foods: The company was founded and run by four Canadian brothers who were the best of friends before one of the brothers was forced out after a disagreement over succession. He later took over Canadian packaged meats company Maple Leaf Foods.

Sumner Redstone battled for control of Viacom with his daughter, Shari Redstone. Photo: Michael Tran/FilmMagic/Getty Images

3. Viacom: Sumner Redstone owns a controlling interest in Viacom, and his daughter, Shari Redstone, owns the rest of the shares, so she seemed like the likely successor. Except they had a very public falling out. Eventually, someone else was appointed as Sumner’s successor. Shari voted against it. Add to the mix a former spouse and various paramours, and the only thing certain about who’s on first—or second—with Viacom is that no one can be sure.

4. Haft family: Herbert Haft was a multimillionaire discount retail magnate with several retailers under his control, but his business came apart very publicly as the result of a family feud. When he took his wife off of a board and fired his son, neither took kindly to these moves, resulting in years of suits and countersuits.

Kathryn Jackson Fallon is a writer in New York.