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Aug 7 . 2 min

REIT Governance: The Capital of Transparency

City

REITs have made strides in corporate governance over the years, in part by doing what’s asked of them by shareholders, but also by embracing the business case for improved governance.

In the eyes of executives at companies that strongly emphasize corporate governance, best practices tend to pay off.

“Having a market-leading corporate governance philosophy does help to drive shareholder value,” says Edward Nekritz, chief legal officer and general counsel at industrial REIT Prologis Inc.(NYSE:PLD). “It’s part of the core beliefs of the company, in terms of doing business the right way.”

Research backs up Nekritz’s view. REITs that had an above-average governance score traded at a premium of 2 percent to asset value, according to a 2013 report by research firm Green Street Advisors. REITs with a below-average rating traded at an average 4 percent discount to asset value.

REITs in general have improved enough to rank better in several governance categories than most industries in the S&P 500. In terms of governance risk, stock exchange-listed Equity REITs rank seventh on a list of 43 industries compiled by Institutional Shareholder Services, a monitoring service. ISS uses 80 corporate governance factors across four main areas: board structure, compensation, shareholder rights and audit. REITs had a score of 57 out of a possible 100, behind diversified utilities (100), electric utilities (98), computers and peripherals (74), diversified financial services (73), food and staples retailing (64), and insurance (58).

REITs have fared better on several fronts. About 76 percent of REIT directors are independent, compared with 73 percent of those with non-REITs, according to ISS. About 98 percent of REITs publish board guidelines, compared with 80 percent of non-REITs. Only 21 percent of REITs have staggered or classified boards, versus 42 percent of non-REITs. And only 4.4 percent of REITs have a “poison pill,” which refers to a strategy to defend against hostile takeovers, compared with 9.4 percent of all companies.

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