Key Issues for REIT Board Management

REIT magazine: July/August 2019

Walt Rakowich has many ideas about what constitutes good governance—the all-important “G” in a company’s ESG practices. In essence, he says it’s about corporate leadership putting the greater good ahead of the individual. With that core concept in place, much can be achieved—and he should know. Becoming CEO of ProLogis, at the height of the economic downturn in 2008, Rakowich was instrumental in restoring the company’s battered finances, enabling it to merge with AMB Property Corp. in 2011 and making Prologis (NYSE: PLD) the industrial warehouse giant it is today. 

Rakowich, who sits on the boards of three S&P 500-listed REITs, Host Hotels & Resorts, Inc. (NYSE: HST), Iron Mountain Inc. (NYSE: IRM), and Ventas, Inc. (NYSE: VTR), recently shared his views on the key issues that REITs must address to remain top performers.

How important is it for management to build trust with their boards?

Without trust you have nothing. I believe it’s fostered by an environment of transparency—an environment where there is constant communication during and in-between board meetings; brutal honesty about good and bad news; and a unilateral commitment to do the right thing for the organization over anything else. 

With these things in place you can have a transparent culture that fosters trust and you’ll be on your way to building a great environment over time. I’ve seen organizations that have not had one or more of those three elements and, suddenly, the trust begins to break down.

Which governance topics are currently top of mind?

We can’t forget that a board’s most important job is to select strong leadership and enable them to do the best possible job in creating a profitable and sustainable enterprise. I think boards should be constantly talking about succession planning and leadership throughout the organization.

And what are some emerging governance topics you have seen boards start to address?

Culture. I don’t think people were paying much attention to that 10-plus years ago, but culture and employee engagement has become a hot topic and boards are asking a lot more questions about how companies invest in their workforce today. 

Also, board engagement—how does the board become more engaged with shareholders and knowledgeable about how the company is broadly perceived? The importance of IT systems and cyber security is another key emerging issue.

What are some of the biggest risks facing boards from a governance perspective?

Walt Rakowich

The biggest comes from bad leadership. An unwise CEO can cause more harm to a board than any outside risk a board faces. With that in mind, the more independent a board is, the better.

Holding robust executive sessions where all parties can talk freely and openly are so important. The more you have that independence and transparency, the more you can solve a lot of the risks that are out there. 

Are REIT boards active enough in terms of their involvement in strategy and risk management?

Boards should talk about strategy at every single meeting. Strategy is not one of these things that you dust off once a year and make changes to; strategy is constantly being tweaked, and every decision you make needs to be looked at through the lens of strategy. 

As it relates to risk management, the changes are perhaps a little less frequent. However, risk management should be integrated into every approval a board makes, whether it be a transaction, a compensation issue, or succession. 

Board turnover versus continuity—how does a company find that right balance?

You need to have a balance between the two and each board is different. It starts with having a strong board chair and CEO. Self-evaluations can play a role, but the big thing is that boards need to deal with adversity in an upfront and transparent way. 

The more that happens, the better you can deal with the issue of continuity versus refreshment in a proper way over time.

Is the message of diversity getting through?

The message is being heard loud and clear and it’s a great message, but we also must be careful that we don’t define diversity through too narrow of a lens. Gender and race are important, but so are skills. 

Boards can benefit immensely when there is a diverse set of people with a diverse set of skills. If we think of diversity that way, I believe that it will yield powerful results.

What value can activist investors contribute?

Not all shareholder activism is created equal. In the case of Iron Mountain, activists played a positive role as the company listened and ultimately changed its business model to become a REIT. 

In other cases, there are impediments to quickly increasing shareholder value, and in these circumstances, activism is probably not the answer. It’s not always obvious in every case—it needs to be played out.

Are investors expecting companies to show a bigger commitment to ESG issues?

The more important question is, how do best-in-class management teams feel about the need to have an overall ESG strategy? I think the topic has moved from something that in the 2000s was the right thing to do, to now, where it’s more of an imperative. 

When I was at ProLogis, we made it an imperative because our customers wanted us to. So there was a good business reason to do it and it helped us land build-to-suit business with sustainability partners that we would not have landed otherwise. 

Ultimately, without a sound ESG program, you’re not going to attract good people going forward. That is because the best people, in particular the younger workforce, are extremely focused on working for companies with an active ESG agenda.

Are boards clued in to cyber risk issues?

We’re making progress but there really is still a lot to do. The education of board members has ramped up, more time is spent in board meetings discussing cyber risk, and more expertise is being added to boards by profiling board members with suitable backgrounds. But the risks are changing constantly, so it’s always going to be a work in progress.

What do you consider to be the attributes that make a REIT transformational?

First, they are great capital allocators. Second, they are building strong cultures. Transformational companies tend to have great people, and great people don’t stay long any more if they aren’t satisfied with the work environment. 

Rakowich speaks and writes about culture, leadership, and influence at waltrakowich.com, where you can also subscribe to his weekly newsletter.