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May 14, 2013

Who’s Up Next?

By Barbra Murray, Contributing Editor

What do Boston Properties, The Related Cos., Agree Realty Corp. and even newbie Steadfast Income REIT have in common? They are pursuing succession planning. While it is not an uncommon occurrence, nor is it commonplace. “Trying to convince somebody that it’s the right thing to do is kind of like trying to convince somebody to eat vegetables—it just doesn’t work,” attests Nancy Picard, owner of management psychology firm Picard L.L.C.

And even executives that are keeping it in mind may not openly discuss their concerns, outside the company or in. Noted Picard, “Some companies think, ‘That would be private. It might show our position in the market. It might send up our salaries. It might create internal competitiveness.’ There are all kinds of reasons not to disclose.”

In the early months of this year, the commercial real estate industry saw more than a few announcements of promotions and new hires to fill top positions, from president to CEO, that were vacated for a variety of reasons.

At LaSalle Investment Management, there had been no rumblings about the CEO of the Americas position before Peter Schaff revealed in 2012 that he would retire from the post after nearly 30 years with the company.

“We began a succession strategy for the CEO position when Peter announced he was stepping down,” said Stefanie Murphy, global corporate communications director. According to a few news outlets, global CEO Jeff Jacobson wrote in a note to investors: “We are carefully considering internal and external candidates for North America CEO in order to identify the best leader to take the firm forward.” Last month, LaSalle announced that it had chosen HSBC’s Jason Kern, a managing director & head of the Asia-Pacific Real Estate & Lodging Advisory Group, as the “best leader” for the job.

In February, LaSalle had publicized another replacement: Elisabeth Stheeman, most recently COO in Morgan Stanley’s investment banking division, focused on real estate and natural resources, would become global COO upon Kim Woodrow’s retirement at the end of 2013, following 31 years of holding the title. Stheeman joined the LaSalle team in April to commence the transition process.

When Boston Properties announced in March that Owen Thomas, then chairman of the board of Lehman Brothers Holdings Inc., had been tapped to serve as the REIT’s new CEO, the news came as both an expected event and a surprise to the industry. Co-founder Mortimer Zuckerman, who had occupied the role of chairman since Boston Properties went from a private entity to a public company in 1997, had added the position to his duties in early 2010, following the death of then-CEO & co-founder Edward Linde, his friend and partner of four decades. When Zuckerman publicly announced Thomas’ hiring, he reiterated that selecting just the right individual to take over the CEO role had been a matter of great importance for the last three years. The shocker was the fact that the torch was not passed on to president Douglas Linde, an executive at the company since 1997 and Ed Linde’s son.

Quite frequently with real estate companies, public or no, it is a family affair. But even when Junior or the cracker-jack daughter long groomed by dad takes over one of the top positions, the process entails so much more than bloodlines and qualifications. It is probably not something that most corporations would document on paper, but one of the major issues to be taken into consideration with succession planning is … feelings.

And that is where the business of psychology comes into play. It is the board that usually is tasked with the responsibility of guiding a company’s transfer of power.

“You (have to consider) what is the right process, but how do you respect the dignity of the individuals involved, because if you don’t respect their dignity, the process will founder,” Picard said. “It’s not just business as usual when you’re working with a founder. It’s the person’s entire life. So you have to be vigilant that you don’t inadvertently violate what that person is expecting from the process. That’s when you call a psychologist, because you’re thinking, ‘We’re in territory where we understand that something very deeply personal is at stake here.’ ”

To Tell or Not to Tell
Since many companies will not put their cards on the table for all the investment world to see, it is anyone’s guess just how many companies are, indeed, calculating who should be next up at bat.

In January, a rumor circulated in the press that Bruce Ratner, founder, chairman & CEO of real estate developer and operator Forest City Ratner Cos., would step down as CEO and MaryAnne Gilmartin, executive vice president of commercial real estate and development, would replace him. Forest City later issued a statement that was a non-denial denial of the rumor but a proud admission of its planning practices: “The company emphasizes that any such announcement and change in leadership, when appropriate, would be the result of ongoing succession planning that the company undertakes continuously and as a matter of course.”
For any company, there can be legitimate reasons for maintaining a certain level of secrecy on the matter of who will follow whom to the top. On the other hand, there are advantages to your best and brightest keeping an eye on their colleagues’ accomplishments. Ella Shaw Neyland, who became president of Steadfast Income REIT in 2012 following a year as a member of the board and as the audit committee chairman, thinks so. “I think competition is good and we have healthy competition within the company because everyone wants to do well. It’s really not a destructive competition.” Neyland sees succession planning as a four-pronged pursuit necessary even for companies like Steadfast, which has amassed a portfolio of more than 7,600 apartment homes since its IPO in 2010.

“We have shareholders, we have customers—which in our case are residents or apartment communities—and then we have associates, the Steadfast team. So succession planning is an important part of the approach to the three stakeholders we have.” Neyland describes the strategy as a find-grow-groom-promote approach. “First is hiring the right people. There’s a lot of experienced, talented people out in the job market, so when we hire those people, we’re looking for the DNA of a successful associate; we want somebody that’s got the initiative, the intelligence, the integrity, the experience and the energy.” The second step is giving associates a wide scope and opportunity to learn the company, and step three entails promoting or harvesting the talent within your own organization.

The final step can be described as acting on the culmination of steps one through three. “I think if a company has not successfully executed on those first three steps, the concept of succession planning doesn’t make sense,” Neyland asserted. “Grooming almost everyone for a future, for an opportunity within the company—that naturally leads to us being able to, when the time is right, pick someone for a succession plan. Hopefully, a company has a hard time doing that; hopefully they have multiple candidates.”

However, there is no surefire method—not even nurturing talent inside a company’s own walls. “Our goal would be to pick the right person, and if that means going outside, we would go outside,” Neyland said. “Following through with these four steps, we’re hoping that we’re going to have a multitude of people in the organization who are qualified to do that. But we’re a public company with lots of shareholders, and the board’s going to do whatever’s best for the company.”

Whether you cultivate internal talent or eye outside rising stars, it really is never too early to at least consider laying the groundwork for what will ultimately be an inevitable process. But in most cases, there are no hard and fast rules.

On the other hand, too long a wait risks unpleasant consequences. “Often, companies reach out for external guidance when there’s been an internal event or an external event,” according to Picard. “The internal event is usually that there’s been a failure in their own processes, and an external event is some real estate company just goofed up big time and it’s all over the press.”

Earlier this year, Agree Realty Corp. revealed that Joey Agree, president of the company and progeny of its founder, Richard Agree, would follow his father as CEO. “We feel it’s a board’s responsibility to be sure that the company is in the best position to prosper and survive in the future regardless of what happens with respect to a CEO,” said Michael Rotchford, chairman of the company’s nominating and governance committee and an executive vice president with commercial real estate services firm Cushman & Wakefield Inc.

“Every day, there are opportunities for accidents to happen, there’s the opportunity for changes in life that would require people to change their position in a company. If we are not set up to have the best talent going forward, we’re not doing a great favor for our shareholders. In the Agree situation, it was very important to the board to think about succession planning. And as a result, we have a great CEO going forward.”

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