Some findings demonstrate how many REIT practices fall neatly in line with the practices of other firms and industries. With other survey results, the parallels to corporate America are either not always immediately evident or they veer from common practices or popular sentiment.

For example, most FPL/Ferguson respondents described the optimal corporate board as having nine members, consisting of seven independent directors, the CEO and the chief operating officer. This finding echoed popular sentiment, as evidenced by a 2002 study of corporate directors administered by Korn/Ferry International and Corporate Board Member magazine. Here, results showed optimal board size averaged two “inside” members and eight “outside” members.

But in an instance where real estate executives’ sentiments diverge from broader corporate opinion, 54 percent of FPL/Ferguson respondents said the chairman and CEO roles should not be separated. “According to other surveys, this is not a sentiment reflected across corporate America,” Ferguson states.

Indeed, a survey of corporate board members by consultancy McKinsey & Co. last fall found 69 percent of respondents favored splitting the chairman and CEO roles. Also, a poll of non-real estate executives conducted by another consultancy, Christian & Timbers, in November 2002 revealed 86 percent favored dividing duties.

Additionally, the FPL/Ferguson finding on this issue seems to be out of step with current corporate governance thinking. One of the core principles advocated by the Washington, D.C.-based National Association of Corporate Directors is the designation of an independent director as chairman or lead director.

Who Is Being Surveyed?

While disparities should be noted, an alternate reading of the other surveys might suggest the views of public real estate executives actually reflect the views of CEOs across corporate America. Support for this interpretation is found in the Christian & Timbers survey, where responses came from an undefined set of “executives.” The company suggested that, if only CEOs were polled, the results would have been “significantly different.”

The FPL/Ferguson results might be considered significantly different and, perhaps, for good reason: 41 percent of respondents were CEOs and 42 percent were board members. While the finding in favor of not separating chairman and CEO roles rubs against the grain of current corporate governance thinking, a plurality of REIT CEOs have expressed their views in the FPL/Ferguson study. Media attention on CEOs resisting initiatives intended to separate CEO and chairman roles suggests REIT CEOs have company in the executive suites of other industries.

“REIT CEOs historically have been very strong willed entrepreneurial people, much like executives in any industry that has started as an entrepreneurial business and remains so to some degree,” Ferguson says. “Our survey reflects that it’s not easy for these people to give up some control and authority.”

Majority Favor Lead Independent Director

Nonetheless, REITs are clearly displaying a greater understanding of appropriate corporate governance. This is evident in the survey, where 60 percent of respondents say a company should have a lead director if the chairman is also the CEO.

What’s Important When Nominating Potential Directors
Personal Qualities	88%
Public Company Experience	71%
Time & Commitment	69%
Prior Board Experience	52%
Real Estate Background	49%
CEO Experience	46%
Senior Executive Outside the Industry	41%
Wall Street/Investment Banking Experience	21%
Legal Experience	6%
Geographical Diversity	6%
Government Contacts	4%
Female	3%
Person of Color	2%
Local Community Member	2%
Professors & Academics	1%

“This is a promising trend because it recognizes that public companies require strong, independent board leadership,” FPL/Ferguson notes. Here, public real estate executives reflect popular opinion; on the same topic, the Korn/Ferry study yielded a finding of 59.3 percent.

“You’re going to find that lead directors will become much more common because many chairmen and CEOs are the same individual and, therefore, are not independent,” says Michael A. Herzberg, FPL Associates’ chairman and CEO. “It’s an up-and- coming aspect of boards in corporate America.”

“There are going to be more instances of a separation between the chairmanship and CEO roles or the lead director and CEO when the second generation of leadership comes in,” Ferguson adds. He cites as an example United Dominion Realty Trust (NYSE: UDR). When longtime chairman and CEO John P. McCann stepped aside a couple of years ago, his duties were split and Thomas Toomey was named CEO and Robert Larson was appointed chairman.

The balancing of power between chief executives and the board is an area where REITs need to improve, according to Ferguson and Herzberg. Part of this balancing regimen may require CEOs to give ground in areas where they have traditionally held sway. Signs of improvement may only appear in small increments, according to the survey.

“We recently finished negotiating a compensation matter for a company that, previously, would have had the CEO handle negotiations,” Herzberg relates. “Instead, they asked an outside board member to negotiate. That would’ve been heresy a couple of years ago, but that’s progress and it indicates how some CEOs have come to regard corporate governance.”

The Need for Diversity

The survey also covered board representation. The findings, where 61 percent of responses indicated a former CEO should not continue as a board member, approached the 74 percent result in the Korn/Ferry study. Ferguson and Herzberg describe their finding as “heartening,” but deem results on board diversity “disturbing.”

		Investors Weigh In With each new report of corporate malfeasance, it’s becoming clear that industries unscathed by scandal, such as REITs, will need to work to rebuild the public trust washed away in the wake of Enron, WorldCom, et al.

Only 54 percent of respondents said it was important to have a woman on a board and 45 percent necessitated a director of different ethnicity. “This is contrary to the approach in corporate America currently,” according to Ferguson and Herzberg.

BRE Properties, Inc. (NYSE: BRE) has two female members on its board and says this is an important issue for REITs to address, according to CEO and president Frank C. McDowell. “Primarily, it’s important to show both our shareholders and employees that we have people with various backgrounds that are a representative cross section of our constituency,” McDowell says. “I think it recognizes that we need to find talented people, women as well as men, wherever we can find them, with a strong preference for bringing diversity to the boardroom.”

A lack of board diversity may be detrimental to REITs operating in consumer-oriented properties such as multifamily and retail, Ferguson contends. Moreover, many CEOs in other industries who have worked with diversified boards say they’ve benefited from the perspective a woman or person of color offers, Herzberg says. “I’m not sure that happens the instant you put a woman or person of color on the board but, given time, the conversations, how you evaluate markets and how you evaluate issues becomes very different,” he adds.

AMB Property Corporation (NYSE: AMB) has been considered a leader in corporate governance since its IPO in 1997; the founding members of its board included two women. “Gender is not a selection criteria we focus on in a director search,” says Hamid R. Moghadam, AMB chairman and CEO. “We believe it is the diversity of opinion, the independence of thought, and the variety of industry background and experience that creates true board diversity.”

Qualified Board Members

Adding diversity to REIT boards and finding qualified board members are intertwined. According to Ferguson, most of his firm’s board searches currently focus on adding diversity, while also balancing the types of professional backgrounds and personal attributes that make for a qualified board member.

		Analysts Maintain Their Posts Ask an equity analyst and a debt analyst what corporate governance means in their work and you’ll get subtly different answers.

Some 55 percent of survey respondents said that a corporate or entrepreneurial background made for a qualified board member and 31 percent said corporate experience was more helpful than an entrepreneurial background. Both findings reflect current corporate governance thinking, the survey notes.

Regarding important attributes and characteristics of potential directors, public company experience, prior board experience, a real estate background, CEO experience and experience outside the real estate industry ranked high among respondents. These findings also reflect current corporate governance thinking, the survey states.

AMB’s board increasingly reflects executive management expertise from public companies outside the real estate industry. In January 2003, former General Motors CFO J. Michael Losh joined AMB’s board; in May, shareholders elected Delta Airlines COO Frederick W. Reid to serve on the board.

“Being a current or former public company CEO, COO or CFO is an extremely useful board member attribute,” Moghadam says. “But at the end of the day, there is no substitute for integrity and independence. A board member must have the ability to do what’s right and the willingness—but not the need—to go against the grain.”

Ferguson confirms that prior CEO experience, prior board experience and exposure to a public company environment are, indeed, important factors in a director search. “The problem is,” he says, “good board members are in such demand today that, for REITs at least, it is almost impossible to find all three qualifications in the same person, especially if it’s a diversity-driven search.

“[These top] board candidates are asked to serve by Fortune 100 companies and you can only serve on so many boards,” he continues. “Unless there’s a prior relationship with the REIT board, these candidates do not elect to serve on a REIT board over a Fortune 100 company.” (Editor’s Note: To hear from four leading independent directors, read “Independent Voices”.)

Additionally, it is understood that board membership requires time, preparation and commitment, Herzberg relates. In fact, 69 percent of survey respondents identified time and commitment as important attributes for potential directors. With the intensified focus on corporate governance sparking demand for qualified directors and with potential directors aware of the time and commitment levels board service calls for, the cost of that service will be affected.

“Board compensation, in both cash and equity, will increase,” Herzberg predicts. “For companies that were paying total compensation in the range of $60,000 to $70,000, that will increase to $90,000 to $100,000. And the mid-sized companies who were paying from $40,000 to $50,000 will now be in the $60,000 to $70,000 range.”

Measuring Board Performance

Another area likely to change is board performance review. Ferguson and Herzberg describe survey responses on this matter as “promising.” However, they also stress that most public real estate companies don’t have meaningful performance measurement systems in place to assess the entire board or individual directors.

Governance Rankings of 25 Largest Real Estate Companies
Ranked by Industry CGQ Score
Company	Ticker	CGQ Index %	CGQ Industry %
Weingarten Realty Investors	WRI	99.7	99.5
Duke Realty Corporation	DRE	99.5	98.6
Equity Residential	EQR	92.9	98.2
United Dominion Realty Trust	UDR	97.7	97.7
AMB Property Corporation	AMB	94.7	96.4
Liberty Property Trust	LRY	90.9	94.1
Starwood Hotels & Resorts	HOT	47.6	89.4
Apartment Investment & Management Co.	AIV	89.3	86.4
Host Marriott Corporation	HMT	89.3	86.4
New Plan Excel Realty Trust	NXL	74.1	84.5
AvalonBay Communities, Inc.	AVB	87.3	83.2
Mack-Cali Realty Corporation	CLI	86.3	82.7
Archstone-Smith	ASN	85.8	82.3
The Rouse Company	RSE	85.5	81.8
Simon Property Group	SPG	43.0	80.9
ProLogis	PLD	80.1	77.3
Regency Centers Corporation	REG	77.3	75.0
Equity Office Properties Trust	EOP	31.0	73.2
Vornado Realty Trust	VNO	66.7	65.0
Boston Properties Inc.	BXP	64.5	64.1
General Growth Properties, Inc.	GGP	56.9	57.3
Public Storage, Inc.	PSA	47.8	48.2
Health Care Property Investors, Inc.	HCP	36.3	38.2
Kimco Realty Corporation	KIM	28.3	30.5
Hospitality Properties Trust	HPT	10.9	27.7
INDEX AVERAGES
REITs in the S&P 500	85.4
REITs in the S&P 400	80.0
REITs in the Russell 3000	72.2
Source: Institutional Shareholder Services’ Corporate Governance Quotient rankings as of June 11.
Note: ISS does not cover Brookfield Properties Corporation (NYSE: BPO). Each company has two scores: one relative to an index (S&P 500, S&P 400, or Russell 3000) and one relative to an industry (real estate). The scores are percentiles and range from 0% to 100%. As an example, CLI outperformed 86.3% of the companies in the Russell 3000 index and 82.7% of the companies in the real estate group. To calculate each company’s score, ISS gathers data based on 61 issues in eight categories (board, charter/bylaws, audit, state of incorporation, executive/director compensation, qualitative factors, stock ownership, and director education), and applies its formula to reach a CGQ rating.
For more information, visit www.isscgq.com.

“Real estate companies are beginning to think about what they need to do to appropriately evaluate board members; what requirements are necessary to be a good board member and what they want board members to do,” Herzberg says.

Nevertheless, REITs appear to have a lot of company among firms trying to assemble the pieces of a board performance measurement system. According to the Korn/Ferry study, 33 percent of the more than 2,000 executive respondents said their board’s performance was formally evaluated on a regular basis, while only 19 percent said individual directors were regularly evaluated. However, some 76 percent of Korn/Ferry’s respondents stated individual directors should be evaluated.

In the FPL/Ferguson study, a “vast majority felt that a company should have a process to evaluate the effectiveness of the board as well as the contribution of each member.”

“Board review is in its early stages,” Herzberg adds. “Hopefully, this industry will make strides in that regard.”

The Best of Board Practices

The FPL/Ferguson survey shows many similarities exist between REIT board practices and the practices found in other industries. Ferguson and Herzberg emphasize the need for improvement in the industry, but they concede improvement is already underway in many instances, even if it is simply recognizing that a performance review must be developed.

Corporate governance and board practices are interconnected and significant attention is devoted to the activity of corporate boards. In some respects, the focus has assumed the character of a neighborhood block watch. This was evident when the California Public Employees’ Retirement System recently issued a list of “bad actors” in corporate governance. Earlier, Institutional Shareholder Services (ISS), a provider of proxy voting services, released its Corporate Governance Quotient (see rankings on this page), a continually updated rating system designed to help institutional investors evaluate corporate boards and assess the impact their governance practices have on company performance. These and other measures confirm that corporate governance matters now more than ever.

“When you have gone through what corporate America has gone through the past couple of years, boards and managements are going to pay a lot of attention to governance issues,” Herzberg says. “One of the things we will have to see is whether, as companies become much more active and resume growing their businesses, the lessons that were learned over the last couple of years have stuck.”