Long-term Strategy Helps REIT Boards with CEO Succession Planning

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? 

Oftentimes, a board will consider both internal and external candidates to make sure they end up with the best person, as well as provide additional confidence that the decision they are planning is the right one. 

“The best approach that we see is looking at all options,” Burgess says. Companies should assess their internal talent and create a plan for developing leadership. Secondarily, a board needs to overlay those internal efforts with either external mapping of potential candidates or conduct a formal external search, depending on the situation. 

“What you do through that process is figure out what is the strategic direction of the firm, and therefore what is the kind of person and skillset that you would need to lead that strategy,” she says. “Then you can map out internally and externally who ranks the highest with that strategy and position specification in mind.” 

Best Practices for Success

Succession planning is by no means a “cookie cutter” process because there are different situations within the company, different personalities, and different views on the board, notes LoPinto. Oftentimes, the best success stories come from those boards that have made a significant investment in the succession planning process and taken a deep dive in evaluating the leadership team and candidates for the CEO position, he notes. 

In addition to looking at the resume and experience, boards can learn a lot by looking “under the hood” so to speak, at factors such as character and personality traits, drivers, and learning agility, he adds. 

Another strategy is to develop a position specification that outlines what the ideal CEO looks like in terms of background, experience, leadership skills, and responsibilities. The board can look at how internal candidates match up to that specification, and use it as a guide in searching the external market for possible candidates. 

According to LoPinto, some boards go through that exercise when they are at the juncture of making a decision, while others do it as a part of longer-term planning. That specification also can serve as a resource when the company is making decisions to hire or promote people to other key executive positions. “When they are recruiting a CFO or COO, they are looking not only at whether that person is equipped to do that job, but also whether that person could be a viable candidate for the succession planning process,” he says.

Those that are the most successful in grooming the talent have taken a step back and asked ‘what does our CEO success profile look like given the future strategy for the company?’ adds Barbanel. ‘How do we envision that next person?’ 

Equally important is buy-in from board members and alignment around the key criteria. The next step is identifying who internally can match at least some of those qualities and skills. If they’re not capable now, what steps need to be taken to provide needed leadership training? 

“You want to have that heat map to say, we think we could have two or three internal candidates for the CEO spot, but what are we going to do between now and that transition to ready that person and give them chances developmentally?” she says. “If you are thinking of the CIO as the next successor, have you given him or her the opportunity to interface with the board, major shareholders, or the chance to speak up at analyst calls?”

When a board takes the time to do a comprehensive analysis, they can make a decision with conviction, which also empowers the individual who is selected, Barbanel notes. Boards and the outgoing CEO also can take steps to set the new CEO up for success. Do they understand the vision? What are their goals and objectives, and what are their criteria for success? 

In addition, set early milestones, such as one, three and six-month goals and formal check-ins with the chairman of the board, Barbanel advises. If the new CEO has been given the mission of going into a new market or product, are they succeeding? What is the internal feedback? Do they have a coach who is helping them along the way? Even with an internal candidate, it is important to have a “CEO accelerator” plan in place to smooth the transition, she adds.

One of the biggest mistakes companies make in succession planning is not starting soon enough. Effective succession planning can range from a one to four-year process, and a board needs to have a clearly defined development plan. There are a variety of different steps that a company can take to prepare someone for that CEO position, such as external coaching, sitting on different industry committees, or additional education. However, those different steps do take time.

“In addition, if you are preparing the CIO or CFO to take that position, you have to make sure the bench behind them is strong enough also to step up into that role that is vacated,”  Burgess says. “So, you are doing that succession planning down through an organization, and that takes time as well.”

Another mistake is lack of communication or communicating poorly to people who are internal candidates. If an individual doesn’t think their path to the CEO is going very well, they might be more easily poached by another company. If the date of a planned exit stretches out, that can impact the decision also. “Starting early enough, having a good plan, sticking to it, and then communicating it well are some of the top tips for success,” advises Burgess.