Global listed real estate has escaped the detailed levels of scrutiny on governance that other sectors have received in recent years, particularly in the United States (US). For reasons outlined below, most investors seem to have been content to categorise listed real estate entities as special cases to which the standard governance rules do not apply. This is changing. Debate is currently raging on whether real estate investment trusts (REITs) in the US should bring their governance practices into line with other sectors.
To put the debate in context, it is common to find a REIT with poison pills at the ready, founders still in control of management and the board, very little board independence and even less board accountability. Only half of the REIT universe in the US has board accountability consistent with the norms of corporate America, according to Green Street Advisors.
While REITs have different corporate and tax structures and their registers tend to be dominated by specialist REIT investors, these factors alone do not explain the different approach to corporate governance. The difference stems from the state that most US REITs are incorporated in – Maryland. Maryland has a law which enables REITs to call upon extraordinary anti-takeover devices and allows a board to change the date of director elections at any time.
This law protects boards from shareholder accountability in the name of shareholder protection, basically claiming that REITs need to be protected from activist investors who may swoop in and take control of the stock for an unfairly low price. It is a rationale that many investors are challenging. This paper examines the governance issues that are unique to REITs globally and provides an investor perspective on what needs to change, as well as governance issues that are likely to be topical for the sector in 2017 and 2018. The issues that will be covered are:
- Shareholder alignment – why alignment is so important
- Anti-takeover devices in the US – why they should be removed
- Runaway executive pay in the Australian property sector
- Tax risk – when does tax minimisation become tax avoidance?
- Board composition – what does a strong REIT board look like?