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' Stanley V. Ragalevskyy Kirkpatrick & Lockhart Preston Gates Ellis LLP State Street Financial Center One Lincoln Street Boston, MA 02111-295 0 617 .951 .9203 stan .ragalevsky@klgates.co m

SLIDE 2

K&L

I GATES wkj,f,ft i,ck & I : 0l dil i`'i,ustprr (,, e E If s rr ,

What is Board Succession Planning ?

■ Effective board succession planning is not simply

filling a director vacancy when one occurs

■ An ongoing, systematic process to ensure board

continuity and quality through :

■ Identification of the competencies and qualities

expected of directors

■ Assessment of existing board to identify gaps in

desired skills which are presently lacking or may be lost in the future

SLIDE 3 Kli' 1,j`atit f'f Y & ~..;1r, kh l r: 11v (`s, 1.o a Gla1 I , y 1 .1 ~

&L

I GATE S

What is Board Succession Planning ?

■ Improvement and Development of the skills and

capabilities of existing directors through a process of education, training, mentoring and coachin g

■ Recruitment of new directors who will satisfy the

desired competencies and qualitie s

■ Development and integration of new directors into

board through education and training

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K&L I GATE S

What is Board Success ion Planning?

■ An integral part of a bank's governance process ■ Controlled by the Board, not the CE O ■ Tied to the bank's mission and strategic plan

■ Good board succession planning rarely just

"happens" but is a product of the directors' collective commitment to thoughtful planning and willingness to hold themselves accountable

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K&L I GATES

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Board Succession Planning - A Challenge for the Board

■ Board succession planning is a difficult issue for

boards to address

■ Only 1/3 of Fortune 1000 companies engage in board

succession planning

■ Discomfort over establishing standards and

evaluating current board members against them

■ Peer to peer evaluations are more stressfu l ■ Board entrenchment

SLIDE 6

L I GATES

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Board Succession Planning - A Challenge for the Board

■ Things are changing - fast

■ Corporate scandals ratcheting up expectations for

directors

■ Sarbanes-Oxley Act and NYSE listing standards

require public companies to conduct periodic board self-evaluations

■ SEC rules require public companies to disclose the

process used to identify and evaluate board nominees

■ Knowledge explosion and "best practices" making

corporate governance "process" driven

SLIDE 7

K&L I GATES

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Board Succession Planning Has Become a Good Governance Best Practice for Banks

■ It is the right thing to do

■ As a director, you have an obligation to leave your

bank in better condition than you found it and to assure its continuity

■ You cannot fulfill that obligation if you make no

provision for your replacement

SLIDE 8

K& L

I GATES

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The " Blowback" Effect

■

Once a board defines the qualities and skills it wants from prospective directors, it cannot logically exempt its present directors from those standard s

■

Evaluation of current directors is inextricably tied to a board's succession planning effo rts for prospective directors .

■

Plugging gaps in the board through a succession planning process should also get the board focused

• n improving present performance

SLIDE 9

K&L I GATES

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The "Blowback" Effect

■ There is a correlation between boards that

effectively plan for their own succession and good

• governance. Boards at well governed banks tend to

have effective board succession functions because they already have :

■ Board governance principles ■ Board committee charters ■ Effective strategic plannin g ■ Effective management succession planning

SLIDE 10

K&L

I GATE S

Indicators of a Need for Board Succession Plannin g

■ If your instincts tell you that your bank has a

problem with how i t selects and recruits directors, your instincts are probably right

■ Your board may need to pay more attention to

board succession if too many of the following are

true :

■ Your bank has no job description outlining the

qualifications and responsibilities of director s

■ No new directors elected to board in past five years

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Indicators of a Need for Board Succession Plannin g

■ 40% or more of directors have retired or plan to retire

from their primary occupations within the next four years

■ Directors at your bank generally serve until they die

• r become incapacitate d

■ Your bank does not annually assess the

effectiveness of the board and its member s

■ Your board neither provides nor requires directors to

partake in continuing education or training on banking issues

SLIDE 12

K&L

I GATES ,h]P<at nr k, ,.

Indicators of a Need for Board Succession Plannin g

■ Your bank has a "3" or worse rating for the

management component in its most recent safety and soundness examinatio n

■ Your board does not have a a chair who provides

strong leadershi p

■ Your board does not have meaningful succession

planning and development for its CEO and senior

• fficers

SLIDE 13

K&L

I GATE S

Indicators of a Need for Board Succession Plannin g

■ Board succession planning takes real discipline and

commitment

■ Peer to peer evaluations are often dreade d

■ The imposition of accountability can be disquieting

• Unpopular with least productive directors

■ Easy for top tier decision makers to except

themselves

■ Damage from ineffective board succession planning

not visible for years

SLIDE 14 I: Ifis

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I GATE.

Getting Started - Preliminary Governance Considerations

■ There are many governance issues which a board

should consider before initiating a board succession planning process. The most important are :

■ Deciding who will oversee the board succession

process (e .g., the Chairman, the Governance Committee or the full Board )

■ Legal restrictions on the size of the board or the

number of committees which need to be staffe d

■ The geographic and other constituencies which the

board has decided merit representation

SLIDE 15

K&L I GATE S Getting Started - Preliminary Governance Considerations

■ The impact of laws or by-law provisions mandating a

retirement age or term limits

■ Any requirement that directors satisfy an

"independence" standard for board eligibility (e .g ., does the bank have a policy that sitting directors who retire from their jobs or professions, former CEOs of the bank, relatives or close friends of directors, vendors providing services to the bank, loan customers or bank officers are not "independent" and therefore are disqualified from serving as directors)

SLIDE 16

KuL I GATE S

Getting Started - Preliminary Governance Considerations

■ The existence of an advisory committee which

develops prospective directors or serves as a transition point for recently retired director s

■ The impact of board retirement benefit programs ■ These considerations can impact how much

flexibility the bank will have to deal with the board succession planning process

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K&L I GATES

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The Board Succession Planning Proces s

■ An overview of the Board Succession Process :

■ Define the qualifications for being a directo r ■ Conduct a board and/or director self assessment ■ Create a board skills matrix ■ Compare matrix against Bank's strategic plan and

mission to identify gaps in desired skills or attributes among board members

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K&L I GATE S

The Board Succession Planning Proces s

■ Develop plans to improve the performance and skills

• f current directors who need further education and

experience

■ Identify and recruit potential director candidates ■ Integrate new directors by training, mentoring and

education

■ Rotate directors through committees when possible

to develop experienced directors

■ Monitor and update the process at least annually

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K&L

I GATE S

The Board Succession Planning Process

■ Strong, effective leadership and commitment is

necessary

■ Governance committee ■ Effective Chairman of the Board

SLIDE 20

K&L

I GATES I_o ,khll

The Board Succession Planning Process

■ Step 1 . Define the qualifications for being a director

■ Position description essentia l

■ Commitment to mission and strategic objectives ■ Primary rol e ■ Duties and responsibilitie s ■ Personal characteristics (e .g ., integrity, good judgment, high

standards)

■ Core competencies

SLIDE 21 Hip 1 F

The Board Succession Planning Proces s

■ Too many boards fail to define these criteria

■ Raises the expectations for existing directors

■ Step 2. Conduct a board and/or director self

assessment

■ Can take several form s

■ General questionnaire about board effectiveness ■ Individual director self evaluation s ■ Director peer evaluations about each other

SLIDE 22

K&L

I GATE S

The Board Succession Planning Proces s

■ Who sees the completed forms

■ Entire board (Yes, summary only ) ■ Chairman/Committee (Yes, self-evaluation ) ■ Directors being evaluated (No, report to Chair) ■ Facilitator (Yes, peer evaluations)

■ Evaluation forms - draw them carefully ■ Don't go too fast - promote consensus, not division ■ Have policy on destruction of completed forms . No

email

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K&L I GATES

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The Board Succession Planning Process

■ As part of self-assessment process, conduct an

assessment of the Chairman and his/her leadership

• f the Board

■ Step 3. Prepare a matrix summarizing each

director's skills and contribution based upon self assessments and other relevant information . See form .

SLIDE 24

K&L

I GATE S

The Board Succession Planning Process

■ Step 4. Identify gaps or areas where the board

needs improvement or where replacements will be needed

■ Identify skills, competencies or other traits not

possessed by present board members (e .g ., financial/accounting expert, lending expertise, resident of an unrepresented community )

■ Identify any other skills needed to support the Bank's

strategic plans for the future (e .g ., expertise in information technology or payment systems)

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The Board Succession Planning Proces s

■ Identify areas for improvement of existing directors,

develop action plans to address improvement areas and monitor the progress of those plan s

■ Assignment to audit committe e ■ Rotation of members through committees ■ Mentoring by senior board members ■ Education programs

SLIDE 26

&L I GATE S

The Board Succession Planning Proces s

• ■ Identify situations where present board members will

be or should be retirin g

■ Age limits ■ Problem behavio r

• ■ Step 5. Recruitment and transition planning to fill

vacancies with best available candidates .

■ Recruiting new directors

SLIDE 27

L i SATES

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The Board Succession Planning Proces s

■ Compile short list of outstanding candidates updated

periodically with needed skills identified in strategic plan or needs assessment process. Jaundiced eye toward cronies, friends and relatives. Only the "best people ."

■ Consider use of advisory committee as a "farm team" for

director development

■ Due diligence process

• Financial stability
• Absence of black marks (bankruptcy, criminal record )
• Absence of disqualifying factors like blood relationships or

unusually close affiliations with other directors

SLIDE 28

LI GATE S

The Board Succession Planning Proces s

■ Reputation and standin g

• Interagency biographical form

■ Formal orientation and mentoring program for new directors ■ Transitioning existing directors

• Be sympathetic, recognize contributions
• Be sensitive to financial strain s

■ Director fee continuation plan s ■ Create a modest, continuing role or status

Goodwill ambassador

• Advisory committee

Honorary / emeritus director Carefully define parameters

SLIDE 29

& L i GATES

The Board Success ion Planning Process

■ Step 6. Support candidacy of selected candidates

by integrating board succession planning efforts with nominating proces s

■ Step 7. Repeat the process every year

SLIDE 30

L I GATES

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Four Important Director Succession Issue s

■ The board needs a strong chairma n

• ■ Leadership by an effective chairman is a critical

element of a successful director planning functio n

■ Strong leadership by a Chairman of integrity and stature is

necessary to drive the director self-assessment and improvement process

■ Chairman should :

• Set the agenda and tone for effective board functioning

SLIDE 31

K&L I GATE S

Four Important Director Succession Issue s

• Make sure strategic issues are discussed adequatel y

■ Assure that individual directors are developed to their potential

• Promote effective relationships among board members and

management

• Ensure that the performance of the board and individual

directors is assessed annually

• Assure that the board is engaged and accountable
• Promote trust, teamwork and communication
• Ensure board decisions are implemented
• Provide coherent leadership

SLIDE 32 1, h Pr

L i GATE S

Four Important Director Succession Issue s

■ It is important for the board to review and assess the

quality of leadership provided by the Chairman when assessments of board members are performe d

■ Rotation of the Chairman's position may be

appropriate in certain situations

SLIDE 33

K&L

I GATES F r

Four Important Director Succession I ssues

■ Mutuals have unique board succession planning

issues

■ Director support and belief in mutual form most

important defense to preserve mutuality

■ Stress history, mission and purpose of mutual ban k ■ Recruit only those who appreciate and are willing to support

the continuation of the mutual charte r

■ Directors of mutuals have no one looking over their

shoulders to encourage or prompt effective board succession planning

• Greater accountability and self discipline required

SLIDE 34

K&L I GAT E S

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Four Important Director Succession Issues

■ Mandatory retirement ages

■ Third rail of board governance issue s ■ Tendency today is to have mandatory retirement age

(72-75) in the By-Laws

■ Age discrimination laws inapplicable to directors

• Exemptions for incumbent directors commo n
• Waivers for no more than one director

SLIDE 35

K&L I GATE S

.Four Important Director Succession Issue s

■ Difficult issue - money, pride, loyalty ■ Balanced approach needed ■ Be fair to the bank and the directors but the best interest of

the bank comes first

■ The best interest of the bank requires : ■

A board where every director uniformly satisfies a high performance standard Directors who are the best people in the community

■ Periodic turnover on the board to continue to attract the best of

the current generation and make room for them

SLIDE 36

K& L I GATES

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Four Important Director Succession Issue s

■ A balanced board with a fair mix of directors ■ Service on a bank board is a serious responsibility, not an

honor

■ Workable solution on retirement age issues

Mandatory retirement age

■ Allow directors to stay on only as long as they fully satisfy the

uniform performance standards expected of every other directo r

■ This may be hard to enforce ■ Allow no more than one waiver from any mandatory retirement

age

SLIDE 37

K&L I GATE S

Four Important Director, Succession Issue s

• Have a transition pla n

Address financial issues by director retirement or fee continuation pla n

• Address loyalty and dignity issues by director emeritus or goodwill

ambassador statu s

• Avoid "termination" perceptio n
• Board focus to be oriented to deal with tomorrow's strategic

issues

SLIDE 38

L I GATES

• ,:.

Dealing with Ineffective Directors

■ Directors can be ineffective for many reasons (e .g .,

lazy, uninterested, diminished capacity, distrusted)

■ The single best way to get them off the board

■ Make them work hard -real hard! ■ Raise the bar for all directors ■ No exceptions, no "gentleman's C"

SLIDE 39

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K&L I GATE S

Conclusion

■

More community bank boards today are realizin g

■

Not having an effective board succession planning function puts the bank at greater risk

■

Having continuity of leadership at the board level is importan t

■

Having a vibrant board representative of the best people in your community can give your bank a sustainable competitive advantage

■ A bank which develops an outstanding board through effective

board succession planning will be more likely to survive today's difficult competitive environment

BOS-1136432-0