Study Finds REIT Board Governance Practices Strong; More Diversity Needed

10/4/2017 | By Sarah Borchersen-Keto

Study Finds REIT Board Governance Practices Strong; More Diversity Needed

REITs outperform other publicly traded companies in key facets of board governance and best practices, according to a new report, although there is room for improvement in the industry in terms of board diversity.

The report released by Ferguson Partners, Ltd., a global professional services firm, and Board Governance Research, an independent research company, compared 151 REITs included in the Russell 3000 Index to 2,979 other companies in the index.

The report found that 87 percent of REITs included in the study require board directors to stand for election annually, far ahead of the broader market rate of 58 percent. In general, investors are in favor of annual director elections because they prefer the opportunity to vote on each director every year, the report noted.

At the same time, 64 percent of REITs separate out the roles of CEO and board chairman, compared with 58 percent of the other Russell 3000 companies, the report found. The study pointed out that many governance experts advise companies to separate the roles of CEO and board chair upon the next CEO succession.

On the other hand, REIT boards would benefit from increasing their diversity of gender, age and background, according to the report.

The study showed that the other Russell 3000 companies’ boards are more likely to have two or more female directors. Moreover, according to the data, 14 percent of Russell 3000 boards had three or more female directors, compared with 6 percent of REITs.  Fifty-two percent of REITs included in the study had only one female director, compared with 36 percent for the non-REITs surveyed.

REITs’ directors are also more likely to be older when compared against board directors outside the industry, according to the research. One quarter of REIT directors are 70 or older, while only 19 percent of the directors of Russell 3000 companies are in this age range.

Furthermore, the study found that REIT directors are slightly less likely to be under 50 years old. Only 8 percent of REIT directors are under the age of 50, compared with 10 percent of the Russell 3000 directors.

Annalisa Barrett, founder and CEO of Board Governance Research, highlighted the need for REITs to recruit directors outside of their industry. Currently, more than 52 percent of REIT directors are actively employed by a real estate company or a REIT, the study found.

“More forward-thinking boards are now recruiting directors outside of the real estate industry to obtain more diverse views, bring fresh ideas to the table and to avoid possible conflicts of interest issues,” Barrett said.