After spending more than 20 years at the U.S. Securities and Exchange Commission (SEC) focused primarily on public company disclosures, and particularly REIT disclosures, Karen Garnett joined Proskauer Rose LLP's corporate department as a partner and member of its capital markets group in 2018.
The natural overlap between disclosure and governance, especially when it comes to a company's annual proxy statement—typically involving governance-related disclosure matters like electing directors—is just one reason why Garnett's tenure at the SEC has set her up to be a leading corporate governance expert in the REIT industry today.
In the wake of the 2008 financial crisis, Garnett says the SEC expanded some of its disclosure rules relating to corporate governance to require companies to provide more information about compensation and how it is tied to risk, information about how diversity is considered in nominating members to the board, and the board's role in risk oversight, among other things.
"Those are disclosure requirements, but they're really clearly rooted in principles around corporate governance," Garnett says. Since moving to private practice about three years ago, she has had more opportunities to work directly with companies on their governance and disclosure issues.
Garnett, who is on Nareit's Best Financial Practices Council and Accounting Committee, recently sat down with REIT magazine to discuss governance issues.
Beginning with the most foundational areas, Garnett says a REIT board should always be focused on financial and reputational risks, and generally overseeing a company's risk management function.
"Financial reporting would be top of the list: Ensuring that the company has strong and accurate financial reporting [and] has good internal controls over that process," Garnett says. "Financial reporting is essential to how a company communicates with the market and its investors."
Executive compensation, too, will always be a key corporate governance responsibility for boards in overseeing risk management, and a top issue for investors as well.
Boards should also be focused on making sure the company has a governance structure that meets its current needs. If a company doesn't revisit its committee charters after going public, for example, that could present a problem as the company's business strategy evolves or as economic conditions change. Garnett recommends a continual evaluation of the governance structure of the board. Within that same context, looking at the responsibilities of each board committee is key, and particularly making sure the audit committee is not overburdened.
Key Focuses for 2022
Environmental, social, and governance (ESG) issues are at the forefront for every board of every public company in the year ahead, Garnett says. Boards should examine how ESG presents both opportunities and risks to the company, its assets, and its financial performance.
"Certainly ESG means different things for different companies, but whatever ESG is appropriate for your company, that is going to be an area of focus for REITs and for their boards in 2022," she says. This can be anything from the physical or transitional risks from climate change to factors related to human capital, Garnett says.
There is clearly growing investor demand for more information about ESG, Garnett adds, noting that there is some sense that investors also want more comparability in the ESG data being reported. New mandatory disclosure requirements for ESG metrics by the SEC may be on the horizon as well, with an SEC proposal expected in early 2022. ESG metrics in general though, including the level of assurance REIT boards will need to be comfortable with those disclosures, are certainly set to be a key issue in front of audit committees, and likely the full board, in the coming year.
Additionally, it's important that companies have the right kinds of controls over their disclosure process and the information available to the board so that ESG information is being communicated appropriately to the board, and then disclosed appropriately as well. "For example, is the board hearing from the right people? Traditionally, an HR or a diversity, equity, and inclusion (DEI) officer might not get time on the board's agenda, but now that's going to be more common," Garnett says.
Board diversity is also a growing area of focus, and Garnett says nominating committees will play a crucial role in identifying diverse candidates that are best suited to serve on the board. REIT boards should start by identifying the company's diversity goals for the board, including where they are seeking to add new board members with certain qualifications and how they are going to identify those candidates for nomination to the board.
"Even in executive compensation, companies are beginning to consider whether there should be some compensation metrics tied to meeting a certain sustainability goal of the company, or maybe a DEI goal of the company," Garnett notes.
Governance and the Pandemic
The SEC began requiring human capital disclosures in late 2020, and compounded by the pandemic, Garnett says companies began reexamining their outlook on human capital. She notes that, in fact, some industry experts are beginning to redefine ESG as EESG, or environmental, employee, social, and governance issues.
"Health and safety measures that are intended to protect the workforce are tied back to human capital, [including] how the company is managing return to office policies and workplace flexibility," Garnett says. "Those all are highly relevant to employee retention, which obviously can be very critical to a company's performance."
In terms of risk, boards need to understand how these pandemic factors are affecting the business and oversee how the company leadership is managing that risk. A heightened cybersecurity risk also comes into play, Garnett says, with remote work raising new cybersecurity concerns. "Boards need to have current information on those risks and on management's response to those risks," Garnett adds.
Certainly in today's fast-moving business environment, REIT boards have a lot on their plates. But Garnett says the goal should be to search out opportunities when evaluating a company's business strategy, talk to management about that strategy, and constantly think in terms of ESG.
"That could be the upside of all of this: Boards working with management to understand where there are new opportunities arising out of ESG considerations, whether it's climate or DEI or something else, and overseeing that shift in company strategy as well," Garnett says.