An emergency name in the binder is not a successor for a control role

I believe most banks' succession plans for control roles are emergency contact lists presented as development plans. Each critical role has a name beside it, the name is reviewed annually and a readiness rating is attached. The rating is usually an opinion. My position is that for the roles a bank's supervisors and board depend on most, a successor should count as ready only when they have already done a meaningful part of the job under observation, and that boards should pay for the acting assignments and rotations that produce that evidence.

By control roles I mean the positions whose holders the board relies on for an independent account of risk: the chief risk officer, the chief audit executive, the chief compliance officer, the Bank Secrecy Act officer, the treasurer and the heads of credit review and model risk. At Callowmere the board designates seventeen roles as critical, and these make up most of them. They share a feature that makes succession harder than for business roles. Their holders need technical depth, standing with the board and supervisors, and the independence to disagree with executives who may also be judging their readiness.

The acting name in the binder

In October 2022, eighteen months after I joined Callowmere, our Bank Secrecy Act officer resigned with a month's notice to join another bank. The succession plan named her deputy as the ready-now successor. He was capable and well regarded. He had also never led the bank's response to an examination, never presented to the risk committee and never had to decide alone whether a pattern of transactions warranted escalation and a report. Within two weeks it was clear to him and to us that he needed support we had not planned for.

We managed. An experienced adviser supported him for six months, the chief compliance officer took over the committee reporting for a period, and he grew into the role, which he holds today. The episode nonetheless showed me what our readiness ratings were worth. They were judgements made by managers about people they rated highly, without a record of what the successor had actually done. Every one of the seventeen critical roles had a named successor. When I asked how many of those successors had held the role, even temporarily, the answer was six.

Readiness is something a person has already done

We changed the standard in 2023. A successor for a critical role is now rated ready only with evidence of having done a substantial part of the role: acting cover of at least eight weeks, leading a response to a supervisory examination, presenting a committee paper and taking the questions, or owning a significant decision that the role normally owns. The evidence is recorded with dates. The board's risk committee reviews it for control roles and the compensation committee for executive roles. A rating without evidence is reported as developing, however senior the person's sponsor.

The new standard made our succession reporting look worse before it looked better. In the first year the number of critical roles with a ready successor fell on paper to six, because we had stopped counting opinions. Directors asked whether we had created a problem. We had not; we had had it before the new standard, and the difference was that the committee could now see it. Over the following three years we arranged acting assignments during holidays and leave, rotated deputies through examination responses and gave successors committee time with senior support beside them. Fourteen of the seventeen roles now have a successor with recorded evidence.

The cost is not trivial. Acting assignments take deputies away from their own work, and someone has to cover it. A committee paper presented by a successor takes longer to prepare and is sometimes less polished than one presented by the role holder. We estimate the programme costs about US$1.1 million a year in backfill, external support and senior time. Some role holders also found it uncomfortable to watch a successor answer questions they would have answered differently. That discomfort is useful information for a board, because it shows where the institution depends on one person's way of thinking.

Rotation and the independence it tests

The hardest design question is rotation between the business and the control functions. A future chief risk officer benefits from having run something, and a business head benefits from having worked in risk. Yet a control function's credibility depends on independence, and a person who rotates from the business into the second line may end up reviewing decisions they recently made or colleagues they expect to rejoin. Internal auditors face particular expectations about objectivity when they examine an area in which they recently worked.

Our answer is to allow rotation in both directions with conditions. A person moving into a control function does not review their former area for a defined period, normally a year. A person moving from internal audit into the business is excluded from audit work on that area. The chief audit executive, who reports functionally to the audit committee, approves any rotation into or out of internal audit. These rules slow some careers. Two promising candidates declined rotations because of them. I think the conditions are right, but I would not pretend they are free.

There is a version of this argument that becomes a plea for more HR process, and I want to avoid it. The purpose is not a more elaborate template. It is a board knowing, before it needs to know, whether the person named for a role has stood in it. A shorter plan with dated evidence is more useful than a long plan with ratings, and the evidence can be checked by a director who was not present when it was gathered.

I would ask any bank board to request one thing at its next succession review: for each control role, show the evidence that the named successor has already done part of the job, and say when. Where the evidence is thin, ask what assignment would produce it within a year, what it would cost and who would cover the work. A board that funds that work will receive weaker succession reports for a while. It will also know what its reports mean.