Succession planning in banks is key to creating sustainable value in turbulent times

This has specifically emerged as a prominent focus for banks, mutual banks, co-operative banks, and co-operative financial institutions.

Succession planning is the process of identifying critical positions within one’s organisation and developing action plans for individuals to assume those positions to create and sustain value. Succession planning has become a focal point for delivering sustained value in the current challenging economic circumstances driven by inflationary pressures, higher than usual staff turnover across most banks, and regulatory nuances.

While most clients' focus on value creation is based on current staff contingents, considerable room for improvement has been cited in documenting detailed standard operating procedures and storing such systematically utilising cloud-based platforms to allow for ease of reference and use for incoming staff. Induction programmes, training facilitation and continuous learning often are not prioritised, causing strain on the human capital value chain. A further key element is monitoring and evaluating the effectiveness of succession planning to avoid outcomes such as an increased staff turnover rate, non-compliance with pertinent laws and regulations and a negative culture shift within banks.

Furthermore, succession planning was identified as a ‘flavour of the year topic’ by South Africa's Prudential Authority (PA) in its 2022/23 annual report. The PA sought to assess the status of succession planning in banking institutions and gain insights into their processes. Banking institutions submitted information following discussions with boards and executive committees.

Among larger banks, talent management and succession planning were found to be in alignment with statutory and corporate governance best practices, guided by the institutions' strategies. However, the PA highlighted concerns regarding board succession, as retirement of board members could significantly impact effective governance if not proactively managed.

A further notable issue identified was that of insufficient numbers of successors identified across various executive committees and other key roles. This shortcoming tends to create a dependency on key individuals with some identified successors already holding senior positions or are earmarked for other roles - which could limit their availability for succession. This highlights a need for better talent development and preparation.

Additionally, there was a shortage of skills in information technology, particularly in areas such as cybersecurity, data architecture, and software engineering. High turnover in investment banking and risk-related positions, emigration of talent, and difficulties in retaining senior executives in African countries with skill shortages, also pose obstacles. Transformation targets too were found to be below what is required, signaling a need for increased focus on diverse and inclusive succession planning.

In the instance of foreign branches of banks, succession planning was generally deemed adequate, although there were areas for improvement. Responsibility for succession planning in these branches typically lies with the head offices, which handle appointments for the executive committees of foreign branches. Local branch management is responsible for appointing senior management, assurance providers, and other critical roles.

Most succession plans for foreign branches covered all necessary roles and considered successors who would meet transformation targets. However, areas requiring improvement included incorporating talent management, considering short-, medium-, and long-term succession planning coverage (including emergency cover for key roles), and developing metrics to assess the effectiveness of the succession plan annually.

The PA identified several key challenges in this area. Protracted visa processes for expatriate appointments posed difficulties, as did the scarcity of skills for senior roles in the local market. Investment in the development of junior to middle management roles was also needed, along with efforts to improve talent retention across all positions. The PA also observed that global mobility opportunities offered by larger groups often led to higher staff turnover within foreign branches.

Smaller, locally registered banks were found to have succession plans in place that were generally deemed inadequate due to poor execution, a lack of training and development plans, and an internal pool of talent still in the process of being developed. Critical roles sometimes lacked successors, and there was typically a low coverage ratio for immediate successors for executives and critical positions. Transformation considerations were considered in most succession planning processes for smaller banks.

Challenges specific to succession planning for non-executive directors in smaller banks included cooling-off periods and commitments to other boards. These banks also struggled to retain talent, with many employees leaving to join larger banks that could offer higher salaries for scarce skills. Emigration trends were identified as a limitation on retaining and attracting talent. Additionally, competitive salaries were no longer the sole differentiator, as flexible hybrid work arrangements gained more emphasis.

Turning to mutual banks, the PA found that all of them had succession and business continuity plans in place, which were reviewed annually. Boards had developed and approved succession plans for all senior executives, aiming to fill key positions with identified successors while addressing retention strategies. Individuals who performed well were identified and continuously trained to replace key job incumbents.

The size of mutual banks provided an advantage in terms of cross-skilling and cross-coordination. The remuneration/nomination board committees were responsible for ensuring that the succession planning processes remained adequate and adapted to new developments in the economic and business environment.

Key challenges faced by mutual banks included affordability and the attraction of skills. Due to their size and nature, it was difficult for mutual banks to compete with the salaries offered by commercial banks. Additionally, candidates were often unwilling to relocate to mutual banks operating outside Gauteng.

Overall, the assessment of succession planning in foreign branches, smaller locally registered banks, and mutual banks highlighted areas of strength as well as areas in need of improvement. By addressing the identified challenges and implementing best practices in talent management and succession planning, these financial institutions can ensure the continuity of effective leadership and navigate the evolving demands of the industry.

Typically, we challenge clients as to whether they are prioritising succession planning in their organization. In a similar vein, we ask you the reader - are you investing in the development of your human capital value chain? These are important questions to consider as you navigate the challenges of the future.

The initial publication of this article occurred on Moneyweb on December 9, 2023, available here.

Authors:

Jatin Kasan, Partner Financial Services

11 December 2023