Banks must work on succession planning

The art of devolving power smoothly in companies is called succession planning. When a chief executive retires, defects to a rival or is unexpectedly incapacitated, a replacement should have been groomed to take his or her place.

In the last few months there have been opportunities for financial services firms to give their succession plans an airing. Some suggest greater artistry than others.

St James's Place Capital, the fund manager, is to phase in a replacement for Mike Wilson, chief executive. He is Mark Lund, former chief executive of JP Morgan's FundsHub, who will join in January as deputy chief executive and assume the role of chief executive before December 2004.

Wilson says this is a good way of going about it: "Quite often, someone is recruited and within three months they are chief executive. Instead, we've left a whole year to make the change. I will coach Lund into the role."

Michel Pébereau, chairman and chief executive of BNP Paribas, is equally satisfied with his succession planning. When he announced in June that he was stepping down as chief executive, he congratulated himself for fulfilling three criteria of successful succession: advance planning, continuity and good timing.

He said he had identified his successor, Baudouin Prot, in 1993 as the right person to take over. Prot was working for the bank at the time and became chief operating officer in 1996.

"It is extremely rare for an executive to have had such an extended period to prepare taking over the helm of a company," Pébereau reflected. He said the timing was good because BNP Paribas looked set for growth. Continuity was satisfied because Prot was 10 years younger than him and, at 52, was the "perfect age" to run the company.

However, the most highly publicised of recent transfers was Sandy Weill's announcement last month that he will hand over as chief executive of Citigroup to Chuck Prince, a former lawyer and colleague since 1986.

Like Lund at St James's Place, Prince will not take over immediately; he will become chief executive next January.

Management consultants believe that accomplished succession planning usually involves nurturing talent in-house. Vanessa King, a consultant at Towers Perrin, says: "It's about growing people to move into senior management roles. Developing talent internally leads to greater continuity."

Although recruiting outsiders is good for prompting innovation and achieving diversity, it can demotivate existing employees, says King.

This is not good news for investment banks, which have traditionally used headhunters to poach people from rivals for senior vacancies. Jonathan Baines of Whitehead Mann, a search firm, says: "Most banks have been poor at succession planning. The industry has a tendency to recruit from outside instead of nurturing talent in-house."

However, at St James's Place, Wilson says it does not matter that Lund was brought in from outside: "Our managing director and group sales director were involved in the interview process. We consulted with them throughout and they were in complete agreement that it was best to bring someone else in."

With good planning, internal succession should be possible. Barclays, the UK bank, says Matt Barratt, its chief executive, began thinking about who would succeed him shortly after he took the job in 1999. (His predecessor, Michael O'Neill, resigned after one day because of ill-health.)

Barratt's approach has permeated lower levels. Kathryn Wainwright, head of executive talent at the bank, says in the past year the bank has identified a talent population. They include candidates of proven talent who could move into the 400 most senior roles, as well as individuals with emerging talent, which includes graduate trainees.

Wainwright says talented people fulfil three criteria: they have edge, they are exceptional and they are energetic.

In homage to Barclays' internal talent pool, its board has interviewed five internal directors as possible successors to Barratt, whose contract runs out next year. There is speculation that he will become chairman.

Relinquishing the helm as chief executive, only to maintain partial control as chairman, is not unusual. Pébereau is doing this at BNP Paribas, while Weill will remain chairman of Citigroup until 2006.

The move is increasingly frowned upon by corporate governance experts.

Alastair Ross Goobey, chairman of the International Corporate Governance network, says: "In most cases it can be a mistake for a chief executive to move up to the chair." Incoming chief executives often need to challenge the strategy and the culture inherited from their predecessors, he explains. This is not easy when they are lingering on in the form of chairman.

However, Ross Goobey says hanging around is more justified in financial services than elsewhere: the business is often so complex that the former chief executive is sometimes the best candidate for chairman.

There is an alternative to the strain of succession planning. Chief executives who find discussing their own departure unbearable could emulate Hank Greenberg, 78-year-old chairman and chief executive of American International Group, an insurance company.

Greenberg is understood to have written a letter detailing what should happen at the company if he has an accident. It may only be opened after such an incident takes place.