CRE's' 'Failure to Communicate' on Succession Planning

Ferguson Partners headquarters in Chicago. (Photo: Alan Scott Walker)

CHICAGO—“What we've got here is failure to communicate,” warden Strother Martin famously told his charges in the 1967 prison drama Cool Hand Luke. That sentiment is also embodied in the title of a Ferguson Partners Ltd. report detailing the gap between investors and real estate organization, especially REITs, when it comes to the importance of CEO succession planning. Specifically, investors understand the need, while real estate firms lag in taking action.

“Succession planning is critical for an organization's success and investors understand this,” says Dominic Cottone, managing director in Ferguson's leadership consulting group. Some of the most common pitfalls with succession planning, he says, include “organizations not starting early enough, lack of planning, not having an official decision body, not choosing the appropriate successor and assuming that succession planning stops once the successor is chosen, which is not the case. This is why we thought it was important to do a deep dive analysis into this issue and provide our perspective and some proven guidelines.”

The report provides the example of a CEO who was removed over poor financial performance. With no succession plan in place, the company hastily promoted the COO, although the board was not fully confident in his abilities to do the job.

Matters went from bad (a shaky relationship between the interim CEO and the board) to worse (a health issue that left him unable to continue) within a mater of weeks. Another interim appointment, this time elevating the CFO to the CEO chair, created further divides as investors and board members split between supporting the CFO or pushing for an outside appointment.

The importance of proactive succession planning is intensified when, as the Ferguson report points out, the stakes are so high for the real estate industry today. The industry's market capitalization has gone from $115 million at the outset of 2000 to $800 billion today. With 27 REITs now represented in the S&P 500, the real estate sector has been carved out from financials within the Global Industry Classification Standard universe.

Ferguson's experts recommend “5 Pillars” for a successful CEO succession strategy. They include the following:

• Sustainability. The capacity to endure in times of great change, including the ability to remain nimble, flexible and understanding when there is a perceived environmental threat.

• Transparency. A clearly defined way forward, articulated succinctly by the organization and with the opportunity for two-way dialogue and input. In order to establish transparency between organizations and investors, there must be a number of behavioral objectives associated with the engagement.

• Risk Management. A balanced perspective on risk without being too cautious or too careless. To achieve this balance requires a greater understanding for the risk tolerance of organizational leaders and the risk requirements of investors.

• Legacy. Organizational reputation and legacy is an important aspect of the relationship. While many leaders and investors alike are focused on short-term gains, the most successful organizations rely on the impact of their legacy to help transform the future.

• Timing. A structured, ongoing cadence for reviewing and maintaining shared information is a critical aspect of the investor/organization relationship. Although many organization and investors focus upon the annual proxy statement, regular information sharing via formal and informal means is most effective.

Ferguson Partners headquarters in Chicago. (Photo: Alan Scott Walker)

CHICAGO—“What we've got here is failure to communicate,” warden Strother Martin famously told his charges in the 1967 prison drama Cool Hand Luke. That sentiment is also embodied in the title of a Ferguson Partners Ltd. report detailing the gap between investors and real estate organization, especially REITs, when it comes to the importance of CEO succession planning. Specifically, investors understand the need, while real estate firms lag in taking action.

“Succession planning is critical for an organization's success and investors understand this,” says Dominic Cottone, managing director in Ferguson's leadership consulting group. Some of the most common pitfalls with succession planning, he says, include “organizations not starting early enough, lack of planning, not having an official decision body, not choosing the appropriate successor and assuming that succession planning stops once the successor is chosen, which is not the case. This is why we thought it was important to do a deep dive analysis into this issue and provide our perspective and some proven guidelines.”

The report provides the example of a CEO who was removed over poor financial performance. With no succession plan in place, the company hastily promoted the COO, although the board was not fully confident in his abilities to do the job.

Matters went from bad (a shaky relationship between the interim CEO and the board) to worse (a health issue that left him unable to continue) within a mater of weeks. Another interim appointment, this time elevating the CFO to the CEO chair, created further divides as investors and board members split between supporting the CFO or pushing for an outside appointment.

The importance of proactive succession planning is intensified when, as the Ferguson report points out, the stakes are so high for the real estate industry today. The industry's market capitalization has gone from $115 million at the outset of 2000 to $800 billion today. With 27 REITs now represented in the S&P 500, the real estate sector has been carved out from financials within the Global Industry Classification Standard universe.

Ferguson's experts recommend “5 Pillars” for a successful CEO succession strategy. They include the following:

• Sustainability. The capacity to endure in times of great change, including the ability to remain nimble, flexible and understanding when there is a perceived environmental threat.

• Transparency. A clearly defined way forward, articulated succinctly by the organization and with the opportunity for two-way dialogue and input. In order to establish transparency between organizations and investors, there must be a number of behavioral objectives associated with the engagement.

• Risk Management. A balanced perspective on risk without being too cautious or too careless. To achieve this balance requires a greater understanding for the risk tolerance of organizational leaders and the risk requirements of investors.

• Legacy. Organizational reputation and legacy is an important aspect of the relationship. While many leaders and investors alike are focused on short-term gains, the most successful organizations rely on the impact of their legacy to help transform the future.

• Timing. A structured, ongoing cadence for reviewing and maintaining shared information is a critical aspect of the investor/organization relationship. Although many organization and investors focus upon the annual proxy statement, regular information sharing via formal and informal means is most effective.