REIT corporate boards have seen their oversight and stewardship duties intensify this year as companies across all sectors have adjusted to a new operating normal.
REIT corporate boards have found themselves playing an increasingly active and visible role this year as they support management teams in navigating a global health crisis and an economic downturn.
While their core stewardship mission remains unchanged, boards have had to adapt quickly to shifting priorities, all while determining if current changes to the business landscape are temporary adjustments or longer-term structural alterations.
“Boards should be extremely engaged right now because in a lot of sectors important changes are taking place,” Cedrik Lachance, EVP and director of global REIT research at Green Street, said during Nareit’s REITworks: 2020 Virtual Conference in September.
REIT boards have long been charged with two fundamental tasks—making sure that the company has good management in place and that the strategic direction of the company is sound.
COVID-19 hasn’t really shifted priorities as much as it has magnified existing ones, says Walter Rakowich, former CEO of Prologis, Inc. (NYSE: PLD) and current board member at Ventas, Inc. (NYSE: VTR), Iron Mountain Inc. (NYSE: IRM), and Host Hotels & Resorts, Inc. (NYSE: HST).
During times of crisis, liquidity and balance sheet management are a top focus, and cash flow management, operating costs, and dividends are all issues that have been front and center for boards to deal with this year.“The role of boards is the same in many respects. We’re still there to govern, to evaluate and choose the CEO, help the CEO with the management team, plan for succession, and help plan and approve strategy,” Rakowich says.
Yet boards are also more focused on the wellbeing of employees, health and safety issues, and maintaining or enhancing corporate culture when so many people are working remotely.
In some cases, board members are engaging more with key employees below senior management.
“It enables us to see who is doing what in the organization outside of senior management, getting a better understanding of what their jobs are, and it also enables us to understand succession a little bit better,” Rakowich says. It also helps the board get some insight into the company’s culture versus just talking to the CEO or the CFO, he adds.
The current environment has also rapidly accelerated decision-making. “We have a more constant drumbeat of meetings now that everything is virtual,” Rakowich says. As such, the board has more opportunities to ask questions about whether or not the company has the right strategy.
“When you are in an environment like COVID it changes everything, but in general we all have to be more nimble because the pace of change in society is more rapid,” he says.
The key role that boards are playing in the current COVID crisis is underpinned by legal doctrine.
The mandate for both Delaware and Maryland-incorporated REITs is that boards have a duty to be responsible regarding shareholders’ investments and a duty to act in the best interest of the company.
Adam Emmerich, a partner at Wachtell, Lipton, Rosen & Katz, notes that the 1996 Delaware court decision in the Caremark case also reinforced the role of the board to supervise and be knowledgeable about “risky” activities that the company might undertake, and to be responsible in establishing a framework to mitigate and reasonably minimize those risks. “COVID, for many companies, is about as big of an existential risk as you could possibly imagine,” he says.
Some boards held virtual meetings as frequently as once a week during the height of the pandemic to assess and supervise the company’s response. “That’s really part of the Caremark doctrine in a lot of ways, because when you’re facing an existential crisis the buck stops in the boardroom,” Emmerich says.
Obviously, management is still in charge of day-to-day responsibilities. However, the number of meetings that board members have, the extent to which they drill down, and the intensity of the interaction with management and outside experts responsible for advising the board has really expanded in response to COVID, Emmerich adds.
While a board’s seasoned judgement and perspective have always been valued, today that insight is essential.
Debra Cafaro, Ventas chairman and CEO, says having the support of an engaged and knowledgeable board of directors during this challenging environment has been a “huge benefit to the company.”
Ventas views its board as a competitive advantage that serves as an asset to both management and shareholders across market cycles.
“We have worked hard for two decades to thoughtfully build a board that is a diverse, independent, and impressive group of individuals who provide sound judgment, hold our company and management to high standards, and think strategically about creating long-term value,” Cafaro adds.
Shruti Shah, a partner in the consulting practice at KPMG, points out that it is the board’s role to challenge management, ask tough questions, and provide guidance.
“Boards often feel like they are the gatekeepers and protectors,” Shah says. “All of the individuals on a board feel very obligated to make sure that they are asking the right questions and they’re getting the answers that they feel they need to have in order to be comfortable that they are providing responsible governance.”
That role is particularly important now, as navigating the current environment is fraught with challenges and uncertainty. As the gravity and scope of the pandemic came into focus, many companies took a triage approach to prioritize where to focus attention and resources to deal with the immediate impacts on the business.
In the early days of COVID, there was a lot of discussion on liquidity, valuation, and how valuations might be impacted. Another immediate issue for boards was understanding how the company itself was going to work remotely. How was the company dealing with issues such as cyber security? How was company culture being impacted? How was the REIT managing health and safety for employees who were returning to the office?
Much of board attention going forward relates to how long the pandemic is going to last, and what the outlook is for the economy and the particular sector.
“That is a really critical area of focus right now. What deals can be done now to mitigate some of the losses? How do we protect ourselves or hedge against risks, and what does the strategy look like to account for that?” Shah says.
Some of the most important topics boards are now tackling relate to whether disruption and shifts in behavior caused by the pandemic are permanent, and if so, what the implications are for demand for space and REIT business models.
“All REIT boards are struggling with the potential for permanency of some of these challenges,” says Keith Townsend, partner at King & Spalding. “It’s just basic blocking and tackling and discharging their fiduciary duties to be thinking about …what kind of secular change this may represent for their business on a go-forward basis,” he adds.
Connie Moore, former CEO of BRE Properties and a board member at Columbia Property Trust, Inc. (NYSE: CXP), noted during the REITworks webinar that “it’s our job to really ask those tough questions about strategy and should it shift.”
According to Lachance, “a lot of boards have to adjust how they think about the next several years, and it’s important to have frank discussions with management teams.”
Ensuring that the best board is in place to help position the company for unforeseen developments—such as a global health crisis—is a detailed process that can be years in the making.
W. P. Carey Inc. (NYSE: WPC) is one REIT that has gone through a fairly significant board refresh, adding seven new board members over the past five years. “That really allowed us to evaluate the company strategy with new voices, differing opinions, and a fresh perspective,” says Jason Fox, CEO. The average tenure on W. P. Carey’s board is now 4.6 years.
Board insight is an important value-add to the company’s vision. “The board is front and center in helping shape our strategy across a number of areas—investments, capital markets, how we look at our balance sheet, asset management, ESG, and corporate culture,” Fox says. For example, the board has supported and been a part of management’s plan to shift the strategy from what had been a hybrid REIT with an investment management platform to a pure- play net lease investment REIT.
W. P. Carey conducts annual board reviews and uses a matrix to evaluate the skills and experience that are represented and where there may be voids that need to be filled. “Diversity is very important. We do want to look for a broad set of skills and backgrounds,” Fox says.
One skills gap that W. P. Carey wanted to fill was finding someone with a background in both legal and talent management. The company found that with Tonit Calaway, who joined the board in September. Calaway is EVP and chief legal officer and secretary at BorgWarner Inc., a worldwide automotive industry components and parts supplier.
Ventas also routinely monitors the tenure, diversity, and skill sets of its board members. “We are very thoughtful about board refreshment, elevation, and succession,” Cafaro says. “We often plan two to four years in advance. We want to retain important institutional knowledge on our board and also bring in new perspectives over time.”
The company has made a point to broaden its selection criteria as it has looked for potential board candidates. For example, Sean Nolan joined the board in 2019. His three decades of experience in the biopharmaceutical industry have helped make valuable contributions to enhance Ventas’ efforts to expand its research and innovation business. “It’s also important that we build a group that works well together and is effective as a unit,” Cafaro adds.
Lachance noted that the coronavirus crisis is going to force a rethinking of what skill sets are most important within an organization. “That evolution is taking place really quickly in the minds of board members and investors, and how to define the right skill set going forward is going to change quite a bit based on what we witnessed over the last six months.”
Changes Remain a Work in Progress
In recent years there has been a massive shift in shareholder expectations related to a company’s board of directors. Investors have been increasingly insistent that boards have more diversity of various kinds—age, gender, ethnicity, and skillset—and not just a “club” of other CEOs, Adam Emmerich, a partner at Wachtell, Lipton, Rosen & Katz, notes.
One of the drivers behind that focus has been the rise of index funds with firms such as BlackRock, State Street, and Vanguard among those dominating the landscape. Index investors tend to take a very large position in every public company within a particular index.
“Those three investors in particular have been very outspoken in their requirements of what they expect for corporate boards in terms of diversity, human capital management, and the whole range of ESG factors,” Emmerich says.
Another factor impacting REIT board composition is that there has been a continued push towards separating the chairman and CEO roles.
As recently as 2014, less than half of publicly traded REITs had separated those roles and now it is closer to 60%, notes Stephen Boyd, senior director at Fitch Ratings. However, roughly one-third of REIT boards can be comprised of insiders or non-CEO executives. “It can be good in some ways, but generally speaking we like to see more independence,” he says.
Expanding women and minority representation on boards is still very much a work in progress, yet REITs are beginning to move the needle.
Historically, there has been a dearth of minority professionals in commercial real estate in general. So, part of the issue is investing time and resources in bringing more diversity to the real estate and REIT industry, which in turn would create a bigger pool of minority candidates for board positions, says Walter Rakowich, former CEO of Prologis, Inc. (NYSE: PLD) and a member of three REIT corporate boards.