Ask an equity analyst and a debt analyst what corporate governance means in their work and you’ll get subtly different answers.
“Corporate governance matters because it is important to make sure the motivations of management on a day-by-day, quarter-by-quarter and year-by-year basis are aligned with shareholder interests,” says Christopher Haley, managing director with Wachovia Securities. “Also, given public company disclosure only occurs on a quarterly basis, good corporate governance practices attempt to ensure that regular practices that do not get reported to the public follow ethical and consistent patterns.”
Moody’s Investors Service initiated a program last year designed to incorporate corporate governance, among other factors, into its credit analysis.
“Our view is that corporate governance is an important component of credit analysis,” relates Arlene Isaacs-Lowe, senior vice president of Real Estate Finance at Moody’s. “We’re going through the process right now of assessing what that means in the analytical process. The things that we’re looking at are how REITs will comply with proposed regulations regarding corporate governance, particularly rules on board makeup and independent board members.”
The major piece of legislation on corporate governance is the Sarbanes-Oxley Act of 2002 (discussed in detail in the current “Professional Perspectives” column).
“Some companies have been in the forefront of preparing for the new regulatory environment,” Isaacs-Lowe says. “And then there are others where it may be a little more complicated, given many of these companies have grown up as family organizations. Even the board members that are deemed technically as independent have some sort of relationship to either the sponsor, meaning the family, or with the management team.”
Haley believes compliance with Sarbanes-Oxley will result in REITs bearing higher consulting expenses and devoting more time to compliance-related matters. “It will also provide greater visual accountability for the decisions that are made and financial statements,” he adds.
In addition, Haley stressed the importance of independent directors having experience outside of real estate. “That’s important because those directors can provide an opinion, context and decision making process that is more general in business practices than specific to real estate,” he says.
The FPL/Ferguson survey also indicated 80 percent of respondents favored directors being required to own shares in the company. Isaacs-Lowe has examined the benefit to the firm of having board members hold significant ownership stakes.
“What we’ve done is try to determine whether they look at their ownership interest as a long-term investment,” she explains. “When they look upon it that way, it tends to have a more positive impact on maintaining the value of the company on an ongoing basis.”
