Succession planning is a key area of focus for managers

In today's post-recession environment, institutional investors are placing a renewed emphasis on “enterprise due diligence” of real estate investment managers. Since real estate commitments are typically long-term, illiquid investments, the continuity and stability of sponsor management teams is a particularly important consideration. Succession planning is a key element of this due diligence process and, while it has always been important, it has become increasingly more so in recent years as more industry leaders near retirement age.

This is not just a real estate issue. In fact, many “alternative” investment firms are closely associated with one or more founders, leaving investors to question what happens when the visionary leader(s) exits the platform. These concerns can have real consequences for fundraising efforts. As one institutional investor stated in a recent FPL interview, “I couldn't invest in another fund without having some clear answers about succession and future leadership.”

It is against this backdrop that FPL Consulting and the National Association of Real Estate Investment Managers recently examined how real estate investment managers are approaching the important topic of succession planning.

While investors' focus on succession planning seems apparent, it is less clear that real estate investment managers are as prepared as they should be. When it comes to “planned” departures (e.g. retirement), respondents of a recent survey rated their overall preparedness as slightly above '3' on a 1-5 scale (5 indicates a fully developed, formalized, documented program that is communicated to employees and investors; 1 indicates no succession plan whatsoever). Only 39% of participants reported a score of '4' or greater, which we consider to be the minimum standard. When it comes to “unplanned” departures (e.g. sudden death/disability or unexpected termination), the level of preparedness is even worse, with an average score of 2.7 and only 21% of firms scoring '4' or better.

Succession planning goes beyond simply picking a successor for a retiring CEO. A comprehensive succession plan is a multifaceted, ongoing approach to managing human capital that continuously evaluates and directs a firm's preparedness for leadership changes. A program should account for both planned and unplanned departures. It should extend beyond the CEO to, at a minimum, the firm's core group of functional and geographic leaders. Ideally, it should be applied to all levels of the organization to ensure a continuous cultivation of talent.

At a fundamental level, succession planning is comprised of three components:

1. Identify


2. Develop


3. Communicate

Any succession planning initiative must begin with identification across two dimensions. First, a firm must identify those leadership positions for which succession plans will be developed. Secondly, potential candidate(s) must be identified for each of the designated positions.

Before selecting from a pool of candidates, a firm must decide whether the pool will consist solely of employees or whether external candidates will be considered. Most firms prefer to grow their leaders internally, and there are valid reasons for this approach. That said, in many cases there are no viable internal candidates, forcing an external search.

When it comes to internal candidates, firms typically utilize one of two approaches in identifying potential successors. Some firms have an obvious “No. 2” widely recognized as the logical successor. For other firms, the choice is less obvious. Oftentimes a CEO is supported by a team of executives, none of whom are significantly more qualified than the others to step into a CEO role. In this scenario, it is both common and appropriate for multiple succession candidates to be identified.

Survey results suggest that most real estate investment mangaers — 65% of those surveyed — utilize a multiple-candidate approach for CEO succession. There are a variety of logical reasons for doing so. Diversification, for example, is one benefit as it can be risky to rely on a single individual, especially when planning for an event that is likely years away. Utilizing multiple candidates can also be a motivational tool to prevent complacency on the part of the successor. Finally, in the early stages of the process it may not be apparent who is most ready to step up into a bigger role. If multiple candidates are identified, it is important to manage the process effectively so as to avoid creating a “horse race” that distracts the organization and results in the departure of talented executives who “lose” the race.

Finally, it is important to point out that the use of a solitary CEO is not necessarily a requirement. Many prominent real estate investment managers are organized as partnerships, with and without a “managing” partner. There are also notable examples of firms utilizing a co-CEO approach to leadership, which is generally most appropriate when the firm's leaders have distinct and complementary skill sets.

Once potential successors are identified, their strengths and weaknesses must be evaluated to identify gaps between the current skill set and requirements for the elevated job. For senior leadership positions, this usually involves broadening one's exposure beyond his/her primary functional area of expertise. An acquisitions officer, for example, may need more experience communicating with investors. A portfolio manager may need more transactional exposure.

For areas in which a potential candidate is lacking in experience, it is important to structure appropriate development activities to cultivate the requisite abilities. These typically fall into one of four categories:

1. On the job training/experience


2. Learning from others


3. Greater external exposure


4. Formal training/education

Despite the importance of leadership development, 53% of survey respondents have not identified specific professional development activities for their succession candidates.

The final component of succession planning is communication. It is not enough to develop a succession program in a vacuum, without relaying the plans to investors and employees. Communication assures key stakeholders that you are proactively managing risk and assessing your leadership needs, thus reinforcing the long term stability of the platform. As one interviewee stated: “Identifying a successor for our CEO alleviated a lot of concerns, both internally and externally, with our investors.”

Succession plans can be communicated both explicitly and implicitly. In many cases, a formal succession planning document is distributed to key stakeholders. In other cases, communication is more subtle, with succession candidates taking on more prominent, outward-facing roles to create familiarity with, and comfort among, investors. This type of “role elevation” can serve as a helpful signal, internally and externally, that an individual is being groomed for future leadership.

Survey participants reported mixed practices in terms of communication. Just over one-third of surveyed real estate investment managers have communicated with investors and employees regarding succession. Conversely, 41% hadn't communicated succession plans to either stakeholder group. Only 43% reported having a formal succession planning document on hand.

Succession planning should be a prominent component of any firm's human capital strategy. Properly addressing this issue will increase the comfort level of investors and employees alike and will help to ensure the health, stability and longevity of the business.

Timothy Kessler is a principal at FPL Consulting.