The importance of good corporate governance practices is evident throughout public companies in all industries. Companies are taking concrete steps to improve oversight of management. Research firms are tracking the results. Investors and analysts are watching more closely.
With so much attention paid to governance, you would assume that there would be a direct correlation to good governance and rising share prices. Well, not quite—at least not in the short term. When noted REIT research firm Green Street Advisors released its governance rankings some of the lowest scoring companies actually were among the industry’s top stock-price performers. Maybe that’s because when you have a company still being run or strongly influenced by its entrepreneurial creators there is less of an impact on performance by governance.
Yet, corporate governance is critical to the long-term health of any industry—ours included. Without it, a company may be too reliant on a single individual, group of individuals or single strategy for maintaining its performance or achieving enduring excellence. Good governance offers some insurance that a company will not lose its footing over extended periods of time.
The opportunity to create good governance structures on a broad scale occurred as so many members of the REIT industry have shifted from a private business with few others looking over their shoulders to become part of a public industry with many shareholders as well as stakeholders. Because the majority of our industry has gone public over the last 10 years or so, companies were able to incorporate many of the newer philosophies of governance right from the start and have been flexible enough to meet the changing needs set forth by regulations and investor interests.
Our industry’s good record speaks for itself. Institutional Shareholder Services measures governance across all industries (see the Best Practices column). REITs posted the third-highest industry average, only surpassed by banks and utilities. Among the areas where ISS noted that REITs outperformed corporate America were publicly disclosing governance guidelines and regularly reviewing board performance.
Those results, as well as the strong CGQ rankings of individual companies, are certainly encouraging. However, as I like to remind our team, you don’t have to be bad to get better. Green Street’s recent report found plenty of room for REITs to improve (see the May/June issue of Portfolio). These negative items, according to Green Street, center on the quality of the board, board power and potential conflicts between company insiders and shareholders.
Every public REIT should have a strong board that is independent and has some skin in the game that ensures the board members’ interests are well aligned with those of shareholders. At the end of the day it is the shareholders that matter most. Good governance isn’t about the short-term gains; it focuses on building and maintaining long-term value for shareholders. I take pride in how our industry stacks up against governance practices throughout corporate America, but I also realize there are more improvements to be made. Individually and collectively we can work to ensure that REITs continue to demonstrate public company leadership and become synonymous with good governance.
Hamid R. Moghadam
NAREIT Chair
Chairman and CEO,
AMB Property Corporation
