By William J. Ferguson

Leadership transitions are botched with alarming regularity. A 2000 study of 400 publicly traded companies identified 94 people promoted to the position of chief operating officer—the launching point to becoming chief executive officer—from 1995 to 2000. Of those, 35 were executives brought in from outside the company. Five years later, 22 of those 35 individuals had left the company before being promoted to CEO, and four were still in their original position—fully 75 percent had not made it to the top as expected.

As compared to corporate America as a whole, the publicly traded real estate industry is still maturing with regard to succession practices. Part of the reason for this is that the industry's generation of founders has only recently begun addressing the succession issue. Some have opted to recruit an immediate successor as CEO, while others have preferred to attract an individual with strong potential—as COO or other executive position—that they intend to watch until they are comfortable that the right choice has been made.

The succession challenge in the real estate industry is compounded by the fact that a substantial number of publicly traded real estate companies are family controlled, which makes it even more difficult to address the issue on a purely objective basis.

Fortunately, in many cases, such as Simon Property Group, General Growth Properties, Inc., Weingarten Realty Investors, Reckson Associates Realty Corporation and Taubman Centers, Inc., there have been strong second-generation executives to "assume the mantle."

Internal or External… That Is the Question

Among the public and private real estate companies, the succession issue has been addressed proportionately, with 50 percent of the leadership recruited from the outside and 50 percent promoted internally. In most cases, it is too early to forecast success and failure. In more mature industries, it is atypical to have 50 percent of the successors coming from outside a company.

Dave Henry was recruited from GE Capital as Milton Cooper's likely successor at Kimco Realty Corporation. Charlie Lowrey left J.P. Morgan to succeed Bernard Winograd at Prudential Real Estate Investors. Also, Steve LeBlanc at Summit Properties Inc. and Jeff Furber at AEW Capital Management were recruited in operating roles, only to be promoted to chief executive officers.

However, in most cases, individuals have been recruited directly for the CEO position. Recent examples include Glenn Rufrano at New Plan Excel Realty Trust, Tom Toomey at United Dominion Realty Trust, Butch Cash at Meditrust Corporation, Fred Kleisner at Wyndham International, Nelson Rising at Catellus Development Corporation, as well as Peter Rummell at St. Joe Corporation, among others.

To the industry's credit, a number of real estate companies have successfully promoted into the chief executive officer's role someone from within. These include Bob Sulentic at Trammell Crow, Earl Webb at Jones Lang LaSalle, Bryce Blair at AvalonBay Communities, Inc., Chris Nassetta at Host Marriott Corporation, Mike Brennan at First Industrial Realty Trust, Tom August at Prentiss Properties Trust, Craig Vought at Spieker Properties, Inc., Chris Wheeler at Gables Residential Trust, and Eric Bolton at Mid-America Apartment Communities. Unfortunately, for all these successes there were also casualties—those who failed at making the transition.

Failure Has a Price

While no single phenomenon can be linked to every failure, the dominant driver behind failed transitions is the successor's inability to manage the change smoothly. And yes, the onus falls squarely on the successor. Few people in the organization can help the successor and the CEO work out any crisis that might arise. Most boards of directors drop out of sight once the successor is hired. Of equal consternation is that most human resources executives can't play a mitigating role, primarily because few of them have the clout to negotiate a peace treaty between a CEO and his/her designated successor. Consequently, the CEO and his/her would-be heir are on their own to work it out.

The successor must be responsible for managing the dilemma, because it is the successor who has the most to lose. The CEO's legacy might be tainted by any problems, particularly if the media covers a conflict. The board may take a hit to its credibility, having bungled one of its primary jobs. And many employees stand to suffer if the CEO and successor battle it out. But no one pays the price like the successor.

Three Ways to Facilitate Transition

That said, there are three techniques that can facilitate the transition between successor and CEO, once again with the responsibility for implementing them falling on the successor:

• Maintain regular communication with the CEO

• Assemble and frequently confer with a balanced personal advice network

• Stay focused on the end game

Communication. Talk is a powerful antidote in leadership transitions. Constant conversations can prevent misunderstandings. Unfortunately, it is too easy for the successor and CEO not to talk. Both are busy, usually with different initiatives, and both travel. Both executives also have different sets of colleagues and friends within and outside of the organization, which makes impromptu conversations less common.

To overcome these obstacles, the successor must seize every opportunity to spend time with the CEO. The successor should travel with the CEO to visit business plants and customers. He or she should set up regular meetings with the CEO to review the business and go into those sessions with more questions than assertions. The successor should also talk to the CEO before announcing a major decision, utilizing such conversations to test ideas and solicit the CEO's input. That's good for the business and great for the relationship. Most importantly, a successor's words and actions should communicate sincere respect for the CEO.

Advice Network. Because few companies have built-in systems to facilitate leadership transitions, successors must create their own network of advisors. The best networks include some people who can offer advice on strategy or operations and others who can offer counsel on the political realities of a company going through an operational change and a leadership handoff.

A balanced personal advice network should be composed of a judicious mix of external and internal advisors. External advisors should be drawn from the successor's mentors, colleagues and friends outside the company. They should have only the successor's interest at heart. Internal advisors should have the requisite technical knowledge and deep insight of the company's operations, history, politics and culture.

Finally, if mediation becomes necessary, a personal advice network can be advantageous. A board member, an outside advisor, or a senior staff member can bring the successor and CEO together, especially if he or she has the trust of both parties and has no vested interest except in wanting to see a positive resolution. Such a person might also be able to reason with the CEO in a way that the successor cannot.

Stay Focused. Probably most importantly, the successor must stay focused on the final goal. Because of the intensity of emotions and competitive spirit of many successors, they consider a disagreement with the CEO as a contest to be won. Unfortunately, this can mean temporarily losing sight of the ultimate goal, which is to move to the top and lead the company forward. Successors must know when to pull back and how to do it gracefully.

One way for the successor to keep emotions in check is to practice empathy and focus on what the CEO is going through, rather than on his/her own experience. Successors need to remember that CEOs increasingly struggle with losing the position that gave them their strong sense of identity. And perhaps the hardest part of managing the successor's dilemma is allowing the CEO to save face. However, it is often the most critical part. In virtually all situations, a successor is well advised to let a CEO's pride win, versus making an issue of it and winning the battle but losing the war.

Drama of Succession

While ages old, the drama of succession is poignant and often painful. As one person rises to the top, another must recede. Succession forces the incumbent, as well as the heir apparent, to confront hard and yet intensely personal questions of power and identity. And unfortunately, this is often done in the spotlight of the media, analysts, investors and colleagues. However, the most crucial audience consists of the two people involved in the transition.

In order to achieve success, the successor must be prepared, and assume responsibility for the leadership transition by drawing on outside help from advisors and working assiduously to create a good relationship with the incumbent leader. The foundation of this relationship is appreciating the emotional roller coaster being experienced by the outgoing CEO, practicing empathy and giving the incumbent the benefit of the doubt.

William J. Ferguson serves as co-chairman of FPL Associates and the FPL Advisory Group and chairman of Ferguson Partners, an affiliate for executive recruiting in the real estate and financial services industries.