By Jon Fosheim

Corporate governance has been a hot topic at Green Street and with our institutional investor customer base for some time. Last August, we published the report "Corporate Governance in the REIT Sector." The topic continues to have broad implications for all REITs and their shareholders.

We often heard that REITs had worse corporate governance relative to other public companies. Despite all of the numerous shortcomings we found in the publicly traded REIT sector, we found no evidence that REITs were any worse than other sectors.

We limited our study and conclusions to the 68 publicly traded REITs (we refer to all of them as "REITs," although a small number of them are actually C-corps) in our research coverage universe.

We agreed early on regarding two important underpinnings to our approach: first, we would not grade on the curve—certain aspects of running an enterprise were either good or bad for shareholders; and second, that we would let common sense trump otherwise well-argued points from management. For example, no argument convinced us that poison pills were good.

Trying to condense the findings of our 18-page report into this space is impossible; so let me go to the heart of the study. We first tried to define the "bad stuff" that can hurt shareholders and entrench management. We called them "Weapons of Mass Entrenchment" (WME). It turns out that REITs, due to some unique features, actually have more WME at their disposal than other companies. Then we arrived at 14 variables that are broadly grouped into three categories, the most important being the quality of the board. This is measured by reviewing structural issues such as staggered elections, the independence and alignment of interests of board members, and the reputation and past practices of each board. The second category measures board power, by reviewing the extent to which power is vested in directors, via WME, as opposed to where the power should be vested—with shareholders. The third category measured potential conflicts between key insiders and shareholders.

The scores suggest that REITs have a lot of room for improvement. None of the companies in our study received an A, four received B's, eight notched C's, five received D's and the rest (51) received an F. Harsh, perhaps, but entirely consistent with the view that poor governance is widespread across all of corporate America.

On a positive note, we did find a number of REITs that had made significant improvements in the right direction, and we have heard from a number of REIT insiders that claim to have taken the pledge to improve. Some of the improvements are simple—it does not take an act of Congress to get rid of such onerous features as staggered board elections; to ban related party transactions; or to throw out poison pills. Fortunately for our industry, there are a lot of powerful institutional investors that separately and collectively might have the muscle to force positive change. Perhaps some REITs will improve without the need for coercion. Their shareholders will applaud them, and it is the right thing to do.