03/18/2010 05:12 am ET | Updated May 25, 2011

Succession Planning 101: Lessons for the Bank of America

The resignation of Ken Lewis as CEO of the Bank of America has left the board scrambling for a credible replacement scenario while the press has had a field day speculating about potential candidates. A hands-off board and a narcissistic CEO combined to create this embarrassing picture of a company that yet again doesn't have its house in order.

It seems that a succession crisis has been allowed to develop by a board that enthroned a CEO who killed off potential competitors. Where was the emergency back up plan, particularly for the CEO role, that is a building block of succession? This stands in stark contrast with the succession plans recently announced by JPM Chase and Morgan Stanley and the example of orderly CEO transition seen in the passing of the baton to Ursula Burns at Xerox. Both GE and Goldman are known for their succession planning and related development of CEO talent.

Given the high rate of CEO failures - the average tenure of a CEO hired into a company is now around three years and 16% of CEOs in financial services turned over in 2008 - it's insane for an organization not to have a robust plan that is reviewed and approved by an involved and challenging board.

The Merrill acquisition debacle, the bank's losses in the sub-prime crisis and poor corporate governance have led to regulatory intervention. Lewis apparently blind-sided directors with his abrupt resignation, prompted by strong shareholder and regulatory discontent. The government has used a strong hand to demand a change in the composition of the board, forcing the inclusion of new directors without clear ties to the DNA of the prior board and leadership team. Ten directors left and six new members were added, with an infusion of directors who have run or regulated major financial institutions. The six person search committee now working on succession includes two new board members, including Donald Powell, a former Federal Deposit Insurance Company chairman.

There's now a very public debate regarding internal versus external candidates, an interim CEO selection and worries about defections of people who are minding this very messy store.

There is speculation about a number of internal candidates - Brian Moynihan, a lawyer who oversees consumer and small business banking, Greg Curl, the recently appointed Chief Risk Officer, and Sallie Krawcheck, the newly hired head of wealth management - as well as outside candidates such as Alfred Kelly, former President of American Express and former JPMorgan Chase investment banking head Bill Winters. Several board members have been mentioned as interim CEO candidates who could help to provide stability and buy time to identify the best long term candidate.

Succession planning has moved from being a largely academic exercise, reviewed on a less than urgent basis by the board once a year, to an element of corporate governance that regulators and investors demand. The game has changed forever as a result of Sarbanes-Oxley as well as TARP, which has put a spotlight on leadership and governance of companies who have accepted bailout funds as well as those who haven't. The ownership for succession has moved from the CEO to the Board. But the cronyism that characterizes many boards, like Bank of America's, plays out in the form of abdication of responsibility for succession and an assumption that the reigning CEO will take care of this exercise. At the end of the day, it can be a game that is all about consolidating and preserving the CEO's power, a non-issue when the stock price is high but a point of conflict when financial results are down.

So what should the Bank of America board have been doing about succession over the last two to three years? Ideally, they should have created a succession plan with a time horizon of three to five years, reflecting the time it takes to develop internal candidates through job experiences that prepare them for the top role. Key positions should have emergency back ups as well as longer term potential candidates. The full board should have been involved in getting to know top internal candidates, with a formal in-depth annual review of key people.

Best practices also suggest that the full board needs to agree on CEO criteria moving forward, identifying the necessary experience and skills for future as well as current business needs. Once potential internal candidates are identified, the board needs to interact with them in a variety of ways, in board room presentations and strategy discussions but also in more informal situations.

Some companies identify potential outside candidates as well as internal candidates. But an underlying assumption is that it's better to promote an insider who knows the culture, can deliver results and build executive team loyalty. If there are critical gaps in the internal talent pool, some companies seek outside talent with the goal of giving a new player time and opportunity to learn about the company and culture before moving into a job in the line of fire.

Demands on CEO leadership in the TARP area have the added dimension of being able to influence government officials and regulators as stakeholders in the management of the business. The next CEO of the Bank of America will have a major challenge in convincing investors and clients as well as employees that there's a clear strategy in place for returning to profitability. As other banks recover and begin rebuilding their teams again, B of A will be a go-to source of talent. And the task of building a culture that bridges the heritage elements of the bank - Merrill Lynch, NationsBank, Countrywide Financial and several others - will be an ongoing challenge. All of this makes the CEO assignment at Bank of America a difficult sell to a leader who has the guts as well as the brains to take on this ailing giant.