Zen and the Art of Shareholder Succession Planning: Part Three

When I talk to community bank leaders about shareholder succession planning, a particular source of discomfort consistently comes to the surface: conflicts of interest. Most bankers engaging in succession planning wear a variety of hats in their day-to-day lives in the bank, and some wear all of them. Each of these roles comes with a set of priorities, some personal, some professional, some hardwired into the laws that govern such role. Participants in the succession planning process might not even appreciate the hats they themselves are wearing, let alone anyone else’s hats, but transparency about these roles and their inherent conflicts of interest is essential to successful transition planning.

Which Hats Are on the Hatrack? Officer, director, shareholder, family member, employee, lender, friend, boss, customer — the list goes on. Think about all the different roles you fill and how they motivate you when planning for the organization’s future.

Which Hat Are You Wearing? On the one hand, the answer to this question seems easy: The hat you are wearing depends on what activity is undertaken. Are you at a board meeting? Obviously, you are wearing your director hat. While reviewing employee benefits plan options for the coming year? Your officer hat, naturally. And at the annual meeting? Well, your shareholder hat, of course. But a closer look reveals a more complicated picture.

That board meeting is to discuss whether to consider selling the organization — if you are an officer, director, significant shareholder, and a voice of leadership for minority shareholders, how do those roles impact your discussions and, ultimately, your vote? That decision about employee benefits plans impacts the bank’s budget and therefore your performance as an officer, but it also impacts the wellness and job satisfaction of your employees and the quality of benefits you receive yourself. At the annual meeting, you are there to vote your own shares, sure, but perhaps you are also presenting the organization’s financials, explaining the board’s decision on budget matters, serving as a trustee for a non-family shareholder, and holding the proxy to vote the shares owned by the company’s 401(k) plan (read: your employees). In whose best interest are you acting (or supposed to be acting) then?

Which Hat Is Most Important? As an attorney, I have no trouble saying that if you serve as a director or officer, your most important hat is the fiduciary duties hat — your obligation to act in the best interests of the corporation. Fiduciary duties are a dense subject that has filled myriad statutes, case law, and academic treatises, with the list of duties and their exact nature varying somewhat from jurisdiction to jurisdiction. But distilled down to essentials, the duties of care, loyalty, and obedience are paramount for leaders of any corporation, and failure to abide by them can result in very real legal consequences. Phrases like “bad faith,” “self-dealing,” and “conflict of interest” litter lawsuits brought against companies by their shareholders, and nothing brings these lawsuits out of the woodwork like decisions about the organization’s future. If you cannot acknowledge your personal motivations and keep them in check, do not put on your director hat.

All of this is much easier to talk about than to actually carry out in practice. People cannot don and shed the emotions and biases behind these roles as easily as we can actual hats, swapping them swiftly and completely mid-conversation as needed. Some of these hats overlap with respect to their obligations or interests; some conversations require multiple hats; some hats can never truly be taken off. And even if you are certain which hat you are wearing in the moment, you cannot assume that those around you know.

Transparency — both with oneself and with others — is a critical ingredient for successful transition planning, and this is the issue that so often complicates it: Why are you doing what you are doing, and is that motivation defensible based on the hats you wear? Community bank leaders need to carefully and deliberately answer these questions through an honest examination of their own motivations. Are there conflicts of interest that need to be disclosed? Do your decisions benefit you (or your family) more than others? Who will be most disadvantaged by your decisions, and what duties do you owe them? Are there votes from which you should recuse yourself, or particular disclosures that should be made? Is it time to bring in an independent advisor for a “gut check” on a course of action? Do your recommendations and decisions pass the “smell test”? 

Other stakeholders in the shareholder succession planning process need to see your answers to these questions, too. Perception is reality, and consciously or unconsciously, people tend to fill factual gaps with their own assumptions, often incorrectly. Acknowledging out loud the different hats those at the boardroom table are wearing underneath their director hats can avoid misunderstandings, schisms, and more serious consequences. Of course, there are still things that must stay behind closed doors — the confidentiality obligations surrounding employment matters, others’ personal finances, health matters, regulatory matters, and attorney-client privileged conversations must be observed, and sometimes questions must be met with non-answers that may feel like a cop-out. But typically, the worst option is to say nothing at all.

Closely held corporations by their nature do not have as many heads to wear the different hats, so a small number of people unavoidably end up wearing too many. But confronting the reality of these hats with candid conversations can go a long way toward avoiding friction and disputes. It might feel clunky and unintuitive. It might require a little self-deprecating humor to break the ice, or even a set of actual, labeled hats to pop on and off throughout discussions as a lighthearted — but poignant — object lesson. In any event, it is an approach that needs the right tone from the top, particularly if the goal is continuing the organization.