12/22/2017 | By William J. Ferguson
In recent decades, REITs have grown rapidly in significance. The most notable evidence of this increased stature was the 2016 decision to establish Real Estate as a separate sector in the Global Industry Classification Standard. With more attention being paid to this substantial business sector, it is natural that more attention will also be paid to the governing boards of these publicly traded companies.
Research recently conducted by Ferguson Partners and Board Governance Research surveyed the board membership and governing practices of the 151 REITs that were included in the Russell 3000 Index as of December 2016, as well as the total 2,979 companies included in the Russell 3000 Index, representing a broader mix of companies within the Index. The Russell 3000 Index, which “seeks to be a benchmark of the entire U.S. stock market,” offers a useful venue in which to compare the board practices of REITs with those of other industries. Takeaways from this research can be easily translated into actionable governance strategies.
A Need for Diversity in REIT Boards
The results of the REIT board survey demonstrate that more diversity for REITs boards in regards to gender, age and industry expertise is needed and could serve to strenthen these boards. In comparison to the boards of Russell 3000 companies, REIT boards are less likely to have two or more female directors: 73 percent of REIT boards have one or zero female directors. Similarly, REIT boards are less likely to be comprised of young members: 8 percent of REIT board members are under the age of 50, compared with 10 percent of Russell 3000 board members. This difference becomes more stark as age increases: 25 percent of REIT board members are over the age of 70, compared with 19 percent of Russell 3000 directors.
Governing boards can be strenthened when they are comprised of a diverse group of directors with varying experiences and viewpoints. Increasing the number of women and young directors in REIT boards offers the potential for more creative and nuanced boardroom discussions, and the introduction of board members from other industries could bring fresh perspectives that would not be provided by those ensconced in the real estate industry.
Injecting New Viewpoints
Recognizing the potential offered by a more diverse governing board, REITs can consider strategies that would inject new perspectives and experiences into their deliberations. For example, research shows that 87 percent of surveyed REIT boards require their directors stand for election on a yearly basis; these elections offer an excellent opportunity to rotate board members with fresh viewpoints into service.
A critical first step to developing more effective board governance is to conduct a regular board composition assessment. This exercise offers the opportunity to evaluate the performance of board members and identify potential areas for improvement with regard to both board composition and governing strategies.
To maintain a fresh and lively board atmosphere, an innovative recruitment strategy should be developed and implemented. These recruitment efforts should focus on identifying able candidates from a variety of ages, backgrounds, and genders. By creating and maintaining a diverse and talented board, REITs will be well positioned to employ the best practices for board governance and meet the demands of their investors.
(Editor's note: William J. Ferguson is chairman and CEO of Ferguson Partners Ltd., an executive search firm specializing in real estate.)