Pub. 2 2014 Issue 2

spring 2014 23 reers in bank disciplines including human resources, supply-chain management, finance, and so on. Fourth, some banks that retained general training programs discovered that the programs were not cost effective. The key to the economics of training is the income realized when graduates serve clients and build revenue and profits. Smart compet- itors without programs realized that they could recruit newly minted trainees and benefit from their training without paying for it. Banks that lost talent grew tired of aiding competitors. And fifth, and arguably most important, starting in the late 1990s bigger banks shifted profit and loss (P&L) responsibility from local markets to centralized func- tions. Driven by the presumed efficiencies, they centralized such decisions as depos- it and loan pricing, marketing, branch planning, and credit underwriting. As a result, fewer and fewer bankers gained broad P&L management experience early in their careers, as the P&Ls got pushed higher and higher in organizations. It is not easy today to find a banker hired after 1995 who has managed a true end-to-end bank P&L After these seismic changes, the financial crisis struck in 2008, triggering nearly 500 bank failures and turning nearly 1,000 institutions into “problem banks.” What do bank failures and problem banks have to do with the talent war? Everything. When banks fail and cause a material loss to the FDIC, federal bank regulators must conduct a material loss review (MLR). More than 100 MLRs have been written to date. Nearly all cite weak management as the leading cause of failure. The talent issue extends to problem banks, too. Their directors get enforcement action letters from their regulator. The most common theme of the letters is the need to upgrade management. Five Actions for Banks to Take Between now and 2020, many baby-boom- er bankers, born between 1945 and 1965 and trained in the 1970s and 1980s, will retire. In my national database of 399 community banks with fewer than $10 billion in assets, the average age of those banks’ CEOs is nearly 59. Fifty of them— about 13%—are younger than 50. Another 40% are 60 and older. Are the directors of banks confident they have adequate succession plans? Do they know the depth of their talent bench? Who will run the nation’s community banks in 2020? In 2030? What should directors of finan- cial institutions do about the talent issue? Every bank should consider taking these five actions in 2013: First, identify, measure, monitor, and report on the state of talent. Though the talent assessment process doesn’t need to be overly elaborate, it must be formal, disciplined, and documented. A good process must include timely and accurate performance assessments for all employ- ees, including senior management. These performance assessments must be honest, fair, accurate, and actionable. Do independent board members have a strong handle on the bank’s talent gaps? Can they show the bank has concrete steps in place to close the gaps? Too often direc- tors find out about their bankers’ skill gaps only after there is a problem. Unfortunate- ly, in the buildup to the financial crisis, too many bank examiners missed the weak-management issue in their CAM- ELS ratings. Directors must be able to judge whether their banks have the appro- priate processes in place to evaluate talent independent of regulators’ judgment. But talent planning must be about more than performance problems. It should also be about retaining and developing your best talent. Directors should ask whether the bank has talent-development plans to advance the skills of its most promising employees. These discussions should focus on multiple generations of bankers. A well-managed bank should have a coher- ent plan for building the skills of those who will run the institution now as well as in 2020 and even 2030. Second, on a related note, make sure you have succession plans in place for all key leadership roles. It is more import- ant today than a year or two ago to take succession planning seriously. Why? As bank balance sheets heal and stock prices rebound, you can expect an upward trend in retirement announcements, just as hap- pened in the period from 1993 to 1998. A banking crisis takes a toll on people. Even the best Eveready bankers can only run so hard for so long. But retirement is not a board’s only suc- cession plan issue. As the industry moves forward and profits return, expect the war for talent to translate into a greater de- mand for a diminishing population of real bankers. You can be sure the best executive search firms are calling on your bankers, telling them about jobs down the street and across the nation. It’s not just CEOs who get these calls. Recently, in the Southeast, a five-person loan platform of commercial bankers moved en masse from one community bank to another. Is your bank prepared to lose all its commercial lenders? If you succeed in keeping them, are you prepared to increase their pay in a world of growing demand and shrinking supply? Third, bank executives and directors need to invest time and money in devel- oping employee skills. Banks built to last must commit to continuing education and, where possible, certification of their employees’ knowledge. Cutting back on employee development is tempting when net interest margins are tight, loan demand is sluggish, and fee income is trending the wrong way. However, the short-term gain often proves penny wise and pound foolish over multiple economic cycles. Fewer and fewer bankers gained broad P&L management experience early in their careers, as the P&Ls got pushed higher and higher in organizations. Fourth, the best bank directors not only examine their bank’s talent, but also look candidly in the mirror and assess overall board skill and experience. In December 2012, American Banker reported on an OCC study of board oversight at the na- tion’s 19 largest banks. The study revealed that only two of these bank boards were demonstrating strong bank oversight, while 14 were at least a year away. What are the chances that thousands of other banks in the country might share the same board oversight issues as the largest banks? Directors at all banks would be well served to conduct a candid and thorough self-assessment. Gaps must be identified and documented. My own analysis of  Talent Risk — continued on page 27