Succession planning has moved more to the forefront for REIT boards in recent years, fueled by aging leadership and an increased focus on governance. The role of CEO is a difficult job in any organization and finding the right person to fill those shoes is equally as challenging. That’s why experts advise companies to create a clear, flexible strategy well in advance of the actual handover date.
During the early days of the modern REIT era, the founders of entrepreneurial real estate companies took the helm after going public and remained in place as long-tenured CEOs, notes Anthony LoPinto, real estate global sector leader for Korn Ferry. “Succession planning is now something that every board is addressing today, and they’re not waiting for chronology to get the best of them,” he says.
When Ed Fritsch decided to retire as CEO from Highwoods Properties, Inc. (NYSE: HIW) after more than 35 years with the company, one of the factors that gave him confidence in that decision was the presence of a clear internal successor in Ted Klinck, who had joined the company in 2012. “Ted wasn’t hired with the intent of becoming CEO, but I knew that he had CEO potential, and he evidenced that every day he came to work,” Fritsch says.
Although Klinck officially stepped into the role of CEO when Fritsch retired in 2019, the company’s board was discussing succession planning well before that date. “Succession planning was always an important part of our strategic plan,” Fritsch says. That strategy included having a couple of names of potential internal and external candidates on deck if needed.
For example, one of the external candidates might be ready to take the CEO seat immediately, whereas the internal candidates might not be ready for three to five years. “So, there is routine conversation around succession planning at the board level, and it is a living, breathing aspect of the strategic plan and one of the board’s top three responsibilities,” he adds.
Governance is getting more scrutiny from stakeholders as part of the broader focus on ESG, and many REITs are taking a more programmatic approach to succession planning.
“Succession is an uncomfortable conversation. The CEO does not always like to think about leaving, and the process of choosing a successor can create stress, uncertainty, and hard feelings for senior management,” says Mary Hogan Preusse, a board member for Kimco Realty (NYSE: KIM), Digital Realty (NYSE: DLR), Host Hotels & Resorts, Inc. (Nasdaq: HST), and Realty Income Corp. (NYSE: O).
However, avoiding the conversation is a big mistake. “High functioning boards have the topic of succession on their agenda every year and discuss succession for the CEO, the executive leadership team, and to highlight rising stars at the company. When you are having the conversation regularly, it becomes less uncomfortable,” Preusse says.
Boards Take the Lead
Managing the executive leadership team and succession planning has become one of the most important roles of the board of directors. However, in many cases, there is still room for improvement in developing, monitoring, and executing on those plans.
“The real estate industry has historically been driven by transactions and growing asset value. So, understandably the company’s emphasis is on performance for the shareholders, and sometimes human capital elements can take a back seat,” says Debra Barbanel, who leads the global real estate practice and is a member of the board & CEO practice at Russell Reynolds Associates, an executive search and leadership advisory firm.
“There are likely some REITs that are not doing effective and robust succession planning across the c-suite and below, because it takes such discipline and time commitment to do it right,” she says. “For this reason, some REITs turn to outside advisors to drive and facilitate.”
Talent management is really a time-intensive process, but it is one of the most important jobs that a board has, notes Walt Rakowich, former ProLogis, Inc. (NYSE: PLD) CEO and a member of several boards, including Host, Ventas, Inc. (NYSE: VTR) and Iron Mountain Inc. (NYSE: IRM). “Every board I’m on has a pretty robust and continuous process to monitor succession at all senior levels of the organization,” he says. Those discussions typically take place on several occasions throughout the year, regardless of whether there is an imminent change taking place, he adds.
These days, it is good governance to not only have a succession plan in place, but to have a plan that accounts for different scenarios. Ideally, companies will have plenty of lead time to identify and onboard a successor with a smooth transition. The reality is that companies also need that “hit by a bus” plan where they need to move quickly to fill a vacancy. The board also needs to revisit, discuss, and update those plans periodically.
One of the challenges that boards face is a shortage of executive talent. Every industry is facing the same demographic challenge of aging leadership. The real estate industry also saw additional shake-out during the financial crisis that resulted in people leaving the industry.
“When you look across the industry today, it can be hard to find those people with 20 to 25 years of experience, as many of those mid-level professionals were cut during the financial crisis,” says Gemma Burgess, CEO of Ferguson Partners, a talent management consulting firm.
Historically, discussions on succession planning started perhaps a couple of years before a CEO was planning to step down. Now, these succession planning discussions are happening three to five years before an exit.
“The good news is that a lot of REITs have figured out that succession planning does need to be a longer mindset,” Burgess says. “That is important, because if it does end up as an internal person taking that role, you really need the time to fully prepare the person for that position.”
Internal vs External
One of the biggest decisions for a board is whether to promote an internal candidate or conduct an external search. There are pros and cons to both, and the decision often depends on the circumstances of the individual situation.
Among REITs that are performing well, the preference is to appoint someone internally who can step up into the CEO role. One of the big advantages is that the internal candidate already has familiarity with the company and the industry. “It also sends a very strong message to the company when you promote from within that there is a clear route to career advancement, and the rewards for hard work and loyalty is very incentivizing for the team to witness,” Fritsch says.
“My bias as a former CEO, and now a board member, is to always groom talent internally if you can, and that is consistent with the thinking of the boards that I’m on as well,” Rakowich adds. If a company is building a culture of excellence where associates are given opportunities and empowered to grow, then a company should be able to fill a majority of its executive positions internally. Oftentimes, there are resources and systems in place to train and mentor people to develop that leadership. “So, if you create a good culture, then what better place do you have to recruit from than your own company?” he says.
That being said, there are times when a board needs to shake up leadership and bring in someone new to improve performance. In other cases, the internal talent simply might not exist or is not yet ready for the CEO role. Some of the advantages of hiring an external candidate include bringing in a fresh perspective, new ideas, and perhaps a different skillset that can be valuable if a company is considering diversifying, expanding, or moving in a new direction. At the same time, an external candidate also can come with greater downside risk. Will that new person be up to the job? How will that new leader be accepted by stakeholders? Will he or she be a good fit, or will there be friction?
