Why Starwood’s van Paasschen resigned
 
Why Starwood’s van Paasschen resigned
17 FEBRUARY 2015 10:25 AM

Starwood Hotels’ chairman of the board made clear why Frits van Paasschen would no longer be serving as president and CEO.

STAMFORD, Connecticut—Frits van Paasschen could have done better. 
 
That’s the message from the board of directors of Starwood Hotels & Resorts Worldwide, regarding the resignation of the company’s president and CEO, which was announced Tuesday.
 
“The board is always focused on the future of the company. And with that comes a viewpoint on leadership. With this in mind, we have come to the conclusion that now is the right time to turn to new leadership to drive execution of Starwood’s growth strategy, improve performance, and sharpen our focus on operational excellence,” said Bruce Duncan, chairman of the board, during a conference call Tuesday morning. 
 
He reiterated several times during the call that van Paasschen’s departure was not the result of a disagreement over strategy.
 
“This is not about strategy. … This is all about execution. We want to do better,” he said. 
 
“This change has nothing to do with any disagreement over strategy. It’s about putting the right team in place to ensure effective execution,” Duncan said later. 
 
Heading up that team, at least on an interim basis, is Adam Aron, a Starwood director since 2006 who arrives at the helm with previous experience leading Vail Resorts and Norwegian Cruise Line. 
 
“In my eight-and-a-half years … I’ve seen what we’ve done very well, and candidly I’ve seen what we can do better,” Aron said in his prepared remarks. 
 
He plans to move quickly.
 
“I’m someone with a bias for action—prudent and wise action to be sure, but action nonetheless. … I have no intention of merely being a caretaker,” Aron said. “Our board has given me a clear mission and charge to get certain things done.”
 
When asked specifically what steps he plans to put into place, he outlined four: 
  1. Drive top-line growth through dedicated marketing campaigns;
  2. “perform with a high degree of focus and with higher operational excellence”;
  3. manage costs aggressively; and
  4. “(expand) the size of our pipeline and footprints as we seek the objective of higher net rooms growth.”
Starwood Hotels & Resorts Worldwide systemwide portfolio size during van Paasschen’s tenure

Source: Starwood Hotels & Resorts Worldwide financial statements dated 25 October 2007 and 31 December 2014. Data reflects divisional hotel inventory and includes hotels worldwide that are owned, managed, franchised, leased and held in joint ventures. Numbers exclude vacation ownership units. 

Aron reiterated that Starwood’s core strategy has not changed. 
 
“We can do better. Yes, we were listening to many of you in 2014 and put in place some action steps (that) were the right steps to take,” he said. “Having said that, we can do better.”
 
“The reason that we are having this call today is we want to put (into place) programs and activity that deliver improved results,” Aron later reiterated. 
 
The board of directors is considering both internal and external candidates to fill the CEO position on a permanent basis. When asked how long the process would take, Duncan said, “It will take as long as it takes.”
 
A long time coming
“This is something that’s been building over the past few months,” Duncan said of the board’s decision, which was reached mutually with van Paasschen—a point underscored by the former CEO staying on as consultant to oversee the leadership transition.
 
Van Paasschen’s seven-year tenure with Starwood was not without success, executives noted during the conference call.
 
Since he first joined the company in September 2007, van Paasschen oversaw the rollout of two new brands (Aloft and Element), the acquisition of new collection (Design Hotels AG), the introduction of various technological innovations (e.g. keyless room entry), two corporate headquarter relocations (in China and Dubai), a spinoff of the company’s timeshare unit and an ambitious push to the asset-light operating model. 
 
But he also endured his fair share of tumult—particularly during the past year-and-a-half as Starwood’s performance failed to live up to the expectations of Wall Street. 
 
First came concerns over the company’s capital allocation strategy. Analysts hammered the team during a first-quarter earnings call in 2014 after Starwood returned only $190 million in dividends. Then-CFO Vasant Prabhu resigned less than a week later. 
 
The company ramped up its efforts and ultimately returned approximately $2.4 billion to shareholders through dividends and share repurchases during 2014, but by then lagging unit growth raised another flag. 
 
The company ended 2014 up 7,406 net rooms (or 2% to its existing portfolio of 354,225 rooms) to its global portfolio during 2014. During an earnings call in early February, van Paasschen announced his intentions to accelerate growth by pushing expansion in focused-service brands such as Aloft, as well as by creating a new hotel collection.
 
Also of concern to investors on the company’s past several earnings calls: asset disposals falling off pace on the road toward asset-light. Though executives sold eight wholly owned hotels and one unconsolidated joint-venture-ownedhotel for gross cash proceeds of approximately $817 million during 2014, they still were well off their previously stated goal of disposing $3 billion worth of assets by the end of 2016. 
 
Van Paasschen preached patience in earnings call after earnings call. 
 
On the subject of asset sales, for instance, he told analysts during a recent earnings call that “we're in active discussion with our properties with different owners around the world, some of those are more widely known, some of those are more discreet.”
 
But investors, anxious to take advantage of an unprecedented expansion in the global hotel industry, could wait no longer, and the board took action. 
 
Wall Street reacts 
Wall Street already is responding favorably to the news. 
 
Starwood’s shares (NYSE: HOT) were up 3.5% in the day’s trading as of press time. 
 
“We view this change positively and expect investors will as well given that we believe Mr. van Paasschen lost investor confidence over the past year or so as poor communication of the company's capital allocation strategy, the slower-than-expected asset sale pace and lagging unit growth have caused the stock to significantly underperform the peer group (~2,300 bps of underperformance versus the peer median since the beginning of 2014),” senior analyst David Loeb wrote in a Baird Equity Research note.

10 Comments

  • profits first February 17, 2015 5:41 AM

    Well, it is about time and in this case profits. Lets do it right and make some changes with the entire enterprise team too, such as all the VPs...

  • Anonymous February 17, 2015 6:03 AM

    it's time to get some doers to replace the thinkers.

  • Hot Fan February 17, 2015 6:09 AM

    While it starts with Frits at the top, Starwood has lots of deadwood throughout its operating ranks and in the field. As someone who works with Starwood Hotels, I can say that there are too many "legacy" players in "protected" high-level positions. Starwood isn't innovative anymore as a result.

  • Anonymous February 17, 2015 6:21 AM

    It's about time - new brands are great and "fuzzy" feelings are super, but there was NO operational experience and focus on day to day. As a former Sheraton GM, I hope new management really focuses on catching up to the other big players.

  • HotStock February 17, 2015 6:52 AM

    It's about time - this company needs someone who understands the hotel business as much as branding. The current regime is missing the foundational knowledge that built great brands

  • Realist February 17, 2015 7:02 AM

    You can't simply "buy" loyalty at the expense of the owners. While it is a good thing to reward loyalty, too much of a good thing will kill your profits. having worked at a Starwood property, as well as many others, it is only at Starwood where the inmates are running the assylum. People in Stamfors are so petrified of the SPG members and cater to their every whim that it that is becomes exceedingly more evident that in order to work in the corporate office, you must first have your spine removed. Maybe new blood will return profits to one of the top priotities.

  • Anonymous February 17, 2015 7:09 AM

    Change was needed but they brought in a former marketing guy as the caretaker - NOT an experienced operator so I am skeptical this will be anything about real cost containment and operational improvement. Instead we will see new marketing campaigns and additional focus on the pipeline for growth (i.e. more franchises!).

  • Anonymous February 18, 2015 12:16 PM

    Hotel chains in general and Starwood in particular will gain big once realized that parity is their top obstacle. If Starwood becomes the first chain allowing the markets to define rates based on supply/demand, they will win in the court of public opinion and especially among the millennias that are so concentrate in "share", "like" and "recommend".

  • Realist II February 25, 2015 3:01 AM

    Could not agree more with realist. Moreover Starwood needs to go back to basics. Stop seeking to become a brand/franchise company and stick to the roots of taking care of customers. Hospitality is what got them started but has gotten lost along the way. Time to find it once again. Focus on people.

  • emiliovargas@emiliovargas.com March 1, 2015 11:43 AM

    Yes, at the end of the day, operations is the Princess of the Hospitality realm... right after "location, location, location" comes "operations, operations, operations" ... How you execute your interactions with his Majesty the Guest, will reflect into, Loyalty, Financial, Quality, etc So, to fulfill the operations dream, you need to rely, as usual, in HR! Taking care of your people - relaxed and friendly working conditions ... it is more important then ever!

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