Getting there C with new chief executives and teams of new directors for the companies that make up Canada’s $100 billion investment trust industry C within the next few years offers to be quite the ride.
All companies is going to be affected – mainly because many of them continue to be run by their founders (who are now much older chief executives) and since there has been little turnover within the ranks from the directors. Plus some will improve equipped to handle your way than the others.
That’s the nub of the recent report by Alex Avery, a managing director and real estate analyst at CIBC World Markets. The report, Tending the Flock: REIT Leadership is the second on the same theme Avery has published within the last two weeks. He spent at least a year gathering data for that project.
As REITs approach a change in leadership, Avery writes in the 25-page report “management of executive succession and board continuity and renewal will introduce new challenges to Canadian REITs not previously encountered on the widespread basis.” Indeed Avery expects the job of replacing founding CEOs could be more difficult and much more time consuming than anticipated.
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One particular problem is that some REITs have not needed to switch the CEO; one other issue would be that the board members have, in some cases, been around for some time – which can “complicate the discussion, development and execution of comprehensive succession processes.”
In another part of the report, Avery notes, “the evolution of board management practices among Canadian REITs might have didn’t keep pace with the evolution of the REITs they govern.”
Three measures of not keeping up: 84 per cent from the directors are male; 97 percent are white and also the average board tenure is Ten years. (In certain countries, directors lose the authority to be termed independent after being around for your length of time.) Avery uses the word Pale, Male & Stale to describe that situation.
“We expect investors will increasingly prefer more independent, well-composed boards,” he wrote noting, “it seems reasonable to pursue more gender-diverse boards.” Too Avery lends his support towards the concept of term limits for directors because that “reflects the pragmatic reality that board independence can be compromised through the deeper relationships that develop over long stretches of service.”
Avery offers some suggestions on replacing chief executives, an activity more complicated than for another industries, in part, because of the effects of the 1990s recession when not many professionals entered the real estate industry. Accordingly the real estate executives are under-done with regards to both experience and in building relationships with investors and analysts.
Avery believes that pro-active REITs will have a so-called first mover advantage when they attract and retain the next generation’s best and brightest. In general he is not an advocate of the chief financial officer becoming the brand new chief executive – unless the chief has taken time to gain operational experience. The key reason is the different skill-sets required for the 2 positions.
Avery extends that view arguing the new CEO must have different skill-sets compared to those from the founder in part since the organizations are now larger and more complex.
The bottom line is that investors need to pay attention because of the strong likelihood that the future will change than the past.
bcritchley@nationalpost.com
