REIT Corporate Governance Is a Case-By-Case Story

NEW YORK, NY—Corporate governance is not a “one-size-fits-all” proposition, says the Goodwin Law Firm in its recently released report “2019 Update: Corporate Governance Trends in the Public REIT Sector.” The report explores how corporate governance for public REITs continue to be a hot topic.

‘We do not recommend any particular set or subset of governance positions as a blunt instrument approach for all public REITs,” says Yoel Kranz, partner, Goodwin’s REIT Capital Markets and M&A/Corporate Governance practices. “Rather we recommend that the board of each public REIT regularly evaluate the company’s corporate governance profile in light of all relevant facts and circumstances to determine whether it provides the board, in its business judgment, with the tools and flexibility to fulfill its overarching duty to maximize shareholder value over the long term.”

In April 2017, Goodwin released their initial report “Corporate Governance Trends in the Public REIT Sector: An Evolving Landscape,” which reported on various corporate governance metrics that were in use or under consideration in the public REIT market. In its follow-up report, Goodwin believes that REITs, on a whole, have engaged boards who regularly take action with the aim of maximizing shareholder value over the long term and who may have somewhat over-reacted to the growing focus on corporate governance issues.

Kranz tells GlobeSt.com that, on the contrary, the right approach to REIT corporate governance is by a case-by-case analysis, rather than a cookie cutter exercise. REIT boards must be aware that shareholders won’t be better off with a homogenous permissive governance profile that enables one group of shareholders to effectively hijack the company to the detriment of other shareholders. The best corporate governance profile, says Kranz, is one that strikes a balance between owners and management and one that will benefit the long-term value proposition that initially resulted in the REIT’s creation.

REITS have always been responsive to changes in the corporate culture and, like other companies, are paying attention to many issues of the day including Board Gender Diversity and adhering to an Environmental and Societal Criteria (E&S).

“At the end of the day, every public company has to listen to shareholders,” explains Kranz. “ Right now gender diversity in the boardroom rightfully continues to be a focus across industries and sectors, including among public REITs.”

According to the report, as of January 2019, approximately 19% of all directorships across RMZ-constituent companies were held by women. That figure is up from approximately 13% in 2017. As a matter of fact, over one-half of all new directors elected by REITs in 2018 were women. Influential investors such as State Street Global Advisors, BlackRock, and CalPERS have also incorporated board diversity into their voting policies and shareholders have actually shown a willingness to vote against boards that do not show a commitment to gender diversity.

Representing trillions of dollars in gross real estate assets and with a collective portfolio of over 500,000 properties in the United States, the REIT industry encompasses a significant environmental footprint. As a result, adapting a progressive approach to E&S practices will be important for REITs as they work on retaining and attracting capital resources. REITs, too, are not immune from being evaluated on issues such as community involvement, corporate ethics and employee engagement. Carbon footprint reduction, conservation policies and energy efficiency are also considered when REITs are examined under a telescope.