Many public companies, REITs included, have been actively recruiting a more diverse set of directors in recent years, acknowledging the many benefits a board with a range of perspectives, experiences, and backgrounds can provide a company. While strides have been made, there is still a long way to go in this area.
“The numbers tell you that the trajectory is there, but the numbers are still not strong enough,” says Tammy Jones, co-founder and CEO of Basis Investment Group. Jones is among the roughly 16% of minority directors in the REIT industry and the only female Black board chair. She currently serves as chair of Veris Residential, Inc. (NYSE: VRE) and is an independent director for Crown Castle Inc. (NYSE: CCI).
Although the pace of change in board makeup can be slow, there is clear change afoot both in the numbers and requirements for director searches. For example, every search for a REIT board director that Korn Ferry has taken on over the past 12 months has a mandate that the candidates brought forward need to fit into some diversity category.
“These are not ‘checking the box’ searches. Every search has a serious requirement that they bring the skillset, experience, or background that is consistent with the objectives for additions for the board beyond diversity,” says Anthony LoPinto, global real estate sector leader at Korn Ferry.
In addition to shoring up needed skillsets and areas of expertise, there is a bigger push to add women and minorities, as well as to tap a younger cohort of directors. According to research by Korn Ferry that studied director appointments at the 100 largest REITs between Jan. 1, 2019 and March 28, 2022, 73% appointed at least one new director who brought racial or ethnic diversity to their board.
Among the 231 new directors recruited, 87 were African American, Hispanic, or Asian. Ferguson Partners’ research shows that nearly 30% of REIT board seats are held by women.
“There is no question that the REIT industry has significantly enhanced the level of diversity on its boards,” says Diane Morefield, a retired REIT CFO and current board member for UDR, Inc. (NYSE: UDR). Morefield joined her first REIT board, Spirit Realty Capital, Inc. (NYSE:SRC) 11 years ago. At that time, she was the only woman on the board. Although Morefield left that position in 2018, Spirit Realty now has four female board members.
In addition, the UDR board has four diverse members that are either women or minorities. “I have seen firsthand how vastly it is changing, and how all public companies, and also some of the private companies, are taking board diversity very seriously,” she adds.
According to research by Korn Ferry that studied director appointments at the 100 largest REITs between Jan. 1, 2019 and March 28, 2022, 73% appointed at least one new director who brought racial or ethnic diversity to their board.
Diversity Correlates to Outperformance
REITs are paying more attention to inclusivity and racial inequities for a variety of reasons, ranging from stakeholder pressure to corporate social responsibility. For example, a new diversity requirement is set to go into effect in August for Nasdaq-listed companies that will require companies to either have two diverse directors, one female and one from an underrepresented community, or explain why it doesn’t.
There also is recognition of the value proposition of having a more diverse set of directors that includes women, minorities, and LBGQT individuals. Research shows a connection between diverse boards and outperformance. “I believe that boards, and management teams, that lack diversity are leaving something on the table, and there is empirical data to support that diversity is not good just for diversity’s sake,” Jones says.
As Ferguson Partners noted in its 2022 REIT Diversity Across Boards and Executives research report, a number of studies published in the past five years by groups including McKinsey, Boston Consulting Group, and Wells Fargo Equity Research have found that more diverse boards and management teams produce better financial outcomes for public companies.
Ferguson Partners also conducted an analysis of 134 publicly listed equity REITs that showed a correlation between REIT boards with a higher degree of diversity and the level of total shareholder returns over various time periods. According to the analysis, the median level of cumulative outperformance over five years for those boards rated in the top 50% of board diversity versus those in the bottom 50% of board diversity stood at 2,390 basis points.
Taking an Intentional Approach
Good board practice involves creating a board matrix, and having a clear view of what it means and objectives on where it wants to go in terms of diversity and skillset. “It’s important for any company to look at the overall profile of its board, and any time they recruit a new director it enhances that mix of talent,” says William Ferguson, chairman of Ferguson Partners.
Two of the key themes for discussions around improving board diversity involve being very intentional and inclusive in the search for candidates, Jones notes. For example, Crown Castle is a leader in board diversity with four African American directors. “I would add that it’s not about finding diversity for diversity’s sake. It’s finding qualified folks and making sure they have access to the same board seat opportunities as others,” she says. “The best directors should get the job period, but I believe it is incumbent upon me as a diverse director to make sure that we are inclusive in our searches.”
The numbers tell you that the trajectory is there, but the numbers are still not strong enough.
Good, qualified, diverse candidates are out there, but oftentimes they are more difficult to find as they are not as visible, and they may not have prior board experience. Firms need to expand their search to find the talent, and depending on the specific category or criteria, it may be a smaller pool of candidates.
In addition, the top candidates are in demand and there can be competition to recruit those people to board positions both within and outside of the REIT industry. According to Korn Ferry, 166 (72%) of the new directors appointed to REIT boards since 2019 came from outside the real estate industry. Of the 166 non-real estate new board members, the largest percentage (25%) came from non-real estate financial services, followed by technology at 14%.
Conducting a Broad Search
Traditionally, board members were added largely through personal relationships and networks related to the CEO and other board members. The standard practice these days is to engage a search firm to conduct a broader search.
“I think using a search firm is really imperative to see a broad array of candidates and resumes, but it also helps to have discussions in the board room of diverse candidates people might know personally in the real estate industry and also related or adjacent industries,” Morefield says.
Partnering with a good search firm and also working with trade organizations can help to expand the pool of diversified candidates. Jones is chair of the Real Estate Executive Council (REEC), a trade organization that promotes the interests of executives of color doing business in commercial real estate.
REEC has worked with Ferguson Partners to identify some of the REITs that are lacking diversity and then met with board members as a starting point to open a discussion. “We work together to speak to folks and introduce them to black directors so we can remove the excuse—‘I can’t find anyone,’” Jones says.
Jones also believes that diversity begets diversity. The majority of board placements are done through personal networks, someone who knows someone, versus search firms. What happens as boards become more diverse is that those networks expand, and it is easier to identify a more diverse pool of candidates. Veris has four very qualified ethnic minorities on its board with three African Americans and one Latina director. “Being intentional about inclusivity in the search for candidates yields results,” she adds.
One excuse that has been used for a long time in bringing on women and ethnically diverse directors is that candidates lacked prior board experience.
“The critical thing is to make sure you have good onboarding,” Ferguson says. When a new director joins the company, it is important to help them learn as much as they can as quickly as they can. That means spending time with the other directors and the company’s leadership so they can understand the company’s strategy and its competitive set. “The critical thing is indoctrinating them, educating them, and giving them access to as much information as they can, so they can come up to speed and contribute at the appropriate points,” he says.
A second important component is to have an effective feedback loop that lasts for at least the first year, Ferguson adds. REITs need to collect feedback on the person’s contribution from the board and leadership team and also share that feedback on an interactive basis with the candidate. Companies also need to have a mechanism where they are getting feedback from the candidate. “If for some reason there is a disconnect, that allows you to catch it early. People can talk it out and make corrective action to develop a strong relationship,” he says.
At the end of the day, it also is important for REITs, or any public company, to increase board diversity for the right reasons, Ferguson adds. Companies can benefit from having a variety of people around the room with different experiences and different perspectives, but those perspectives also need to be listened to and considered when decisions are made.
“If there is another agenda, whatever that might be, most good candidates are going to discover that and take a pass,” Ferguson says. “So, it does depend on a company’s commitment to DEI, but for the right reasons.”