Zen and the Art of Shareholder Succession Planning: Part Two

In Part One of this article series, we examined at a high level the importance of planning for shareholder succession for an organization that wishes to remain independent. In Part Two, we will start digging into the details.

The first step in succession planning is to take an honest look at the institution’s shareholder group and analyze what types of obvious succession issues might reasonably arise and when. Shareholder demographics, family history, financial priorities, relationship dynamics, and life circumstances all impact the trajectory of the organization’s ownership, and no two organizations are shaped the same. So, which characteristics matter most?

1. Age Makeup – A bank with an aging shareholder group will need to think about the estate plans for those shareholders. Who are their heirs, and do those individuals have an interest in the organization (or might they upset the applecart, so to speak)? Have trusts been set up for tax planning purposes, and do those trusts meet the Federal Reserve’s requirements to hold bank stock? Start having honest conversations with shareholders to suss out their plans and priorities. This can be awkward and seem intrusive, yes, but it is important to know whether the stock will pass smoothly to a next generation of interested shareholders or whether it might be necessary to come up with a plan to redeem or help arrange for the private sale of that stock.
2. Activity Level/Interest – How does each shareholder feel about the investment and why? Are they active in the organization (perhaps as an employee or director), or do they have an emotional or nostalgic interest in holding the stock and keeping the organization going? Shareholders who have inherited their stock may have a different level of interest than those who made an intentional investment; and similarly, intentional investors may have different expectations for the investment’s performance than a third or fourth generation legacy shareholder. Those with close family ties may be more reticent to sell the organization (for fear their forefathers will haunt them), but distant relatives lacking any personal touchpoints might be more interested in cashing out if given the opportunity. Employees who own shares probably favor holding (and maybe increasing) their investment and protecting their livelihood. Maintaining a list of shareholders who fall into the buckets of “buy,” “sell,” and “on-the-fence” will help the organization predict which shareholders might be persuaded by a sale opportunity, which might resist, and which can be connected to provide liquidity internally within the shareholder group when certain shareholders may want or need to sell their shares.
3. Control and Dilution – More concentrated shareholder groups certainly can be easier to steer when votes are needed, particularly if there is a strong “primary” shareholder at the helm. A small group of controlling shareholders is likely to have a different dynamic than a larger and more diluted group, particularly where there are familial or professional ties — but that does not mean they necessarily have the same priorities. For example, a group of six cousins might share a family legacy but nothing else, while a larger group might look unconnected until it is appreciated that they are all employees with a vested interest in the organization’s success. Maybe different factions within the shareholder group have self-designated leaders who speak for the rest of their cohort. Keeping apprised of the control dynamics and most influential voices helps management predict where priorities might align and diverge and utilize opportunities to find common ground.
4. Financial Needs and Priorities – This issue transcends other demographic features, as it fluctuates constantly and sometimes unexpectedly. A young shareholder who inherits stock might be more interested in liquidating and putting that cash toward an education, a downpayment on a home, or basic cashflow needs before their career picks up steam. An older shareholder similarly might want to divest to support their grandchildren’s cash needs or cover their own expenses related to aging. A shrewd investor might decide to reallocate their investment to something more lucrative — or maybe liquidate other investments in favor of bolstering their position in the bank. And of course, an emergency for any shareholder can change their financial needs and priorities in an instant, and good planning will help ensure the organization can meet these smaller liquidity needs without having to resort to an all-out sale.
5. Relationship Dynamics and Conflicts – Intrapersonal relationships within shareholder groups can be incredibly determinative of the organization’s future. Shareholders with different priorities or opinions can work together to steer an organization smoothly through respectful and open discourse, but shareholders who objectively want the same things can blow up an organization if petty squabbles or personality clashes triumph over good sense. Maybe an ongoing feud between two shareholders means they will never let themselves agree on anything. Perhaps Shareholder A will automatically vote the same way as Shareholder B (whether out of trust, loyalty, or something else). Younger and less experienced shareholders might be more comfortable deferring to senior shareholders. Maybe an otherwise copacetic group is being disrupted by one or two agitating voices. Or maybe everyone eventually just does whatever Uncle David says. Leadership needs to take these dynamics into account when considering how to communicate with shareholders and present them with decisions to make or opportunities for liquidity — not to manipulate, but to facilitate good governance.

Knowing how these characteristics come into play is critical for effective succession planning, but so is remembering that these things will change. Today’s set of circumstances will not be tomorrow’s, and behaviors presumably motivated by any of the above might not apply consistently generation over generation or even individual over individual. Keep lines of communication open with your shareholders so you can see shifts coming and plan for transitions in a mutually beneficial way.