By Paul Wanner
There is a consensus in financial circles that corporate governance is gaining an important role in investment decisions. But the challenge for investors is determining how to value positively or negatively certain aspects related to governance. Institutional Shareholder Services’ (ISS) Corporate Governance Quotient (CGQ) is a rating system designed to assist institutional investors in evaluating the quality of corporate boards and the impact their governance practices may have on performance.
The database features corporate governance rankings on nearly 7,400 companies worldwide. ISS analyzes 61 data points to derive each U.S. issuer’s CGQ. Ratings are calculated on the basis of eight core categories: board of directors, audit, charter and bylaw provisions, anti-takeover provisions, executive and director compensation, progressive practices, ownership, and director education. Each company is scored individually and ranked relative to its index and industry peer group.
The group of REIT companies studied in this analysis exhibits superior governance practices relative to the entire universe of companies ranked by ISS. In general, real estate companies as an industry have higher average CGQ than all but two other industry groups—banks and utilities. What makes the REIT sector so interesting is that the companies have relatively low market caps with relatively high CGQ scores. The usual trend is for larger companies to have higher CGQ scores.
As illustrated in the chart on page 58, the REIT group outperforms the “all company” group in almost every category. The differences are greatest in the areas of transparency and accountability (disclosure of governance guidelines, reviewing the performance of the board, and having outside directors meet without the CEO).
The only meaningful areas where REITs are found to be lacking are in the audit and compensation categories:
- By a two-to-one margin, the REIT group is more likely to have CEOs listed as having related-party transactions
- REIT companies are more likely than the “All” group to have their option plans align with company performance (by 86 percent to 53 percent, which is a positive), but they are also more likely to grant options at a higher rate than their peers (by 47 percent to 34 percent)
- REIT companies are less likely to ratify their auditors at annual meetings
- REITs are more likely to have non-audit fees exceed audit fees, but not by much.
Overall, the REIT group significantly outperforms the rest of the CGQ coverage universe. REIT boards and committees have a higher percentage composition of independent directors, and with the exception of about six criteria, are more progressive in their governance practices.
Research has established that companies with a higher degree of board independence, especially in conjunction with a certain level of stock ownership, are more likely to outperform their peers. Recent research indicates that companies with a low CGQ are more risky and less profitable than companies with a high CGQ. Good governance practices cannot guarantee investors an absence of fraud, but should decrease the risk associated with poor corporate governance practices.
Governance Rankings of 30 Largest
Real Estate Companies
Ranked by Industry CGQ Score |
| Company Name |
Ticker |
Index Group |
Index CGQ |
Industry CGQ |
| Weingarten Realty Investors |
WRI |
Russell 3000 |
99.9 |
100.0 |
| Equity Residential |
EQR |
S&P 500 |
99.0 |
99.6 |
| Catellus Development Corp. |
CDX |
Russell 3000 |
99.6 |
99.1 |
| Equity Office Properties Trust |
EOP |
S&P 500 |
96.7 |
97.8 |
| AMB Property Corp. |
AMB |
S&P 400 |
97.5 |
96.0 |
| Duke Realty Corporation |
DRE |
Russell 3000 |
97.6 |
93.8 |
| Simon Property Group, Inc. |
SPG |
S&P 500 |
85.6 |
92.9 |
| Health Care Property Investors, Inc. |
HCP |
Russell 3000 |
96.3 |
91.5 |
| AvalonBay Communities, Inc. |
AVB |
Russell 3000 |
96.0 |
90.6 |
| Starwood Hotels & Resorts Worldwide, Inc. |
HOT |
S&P 500 |
43.3 |
89.9 |
| The Rouse Co. |
RSE |
Russell 3000 |
92.6 |
87.5 |
| General Growth Properties, Inc. |
GGP |
Russell 3000 |
92.4 |
87.1 |
| Liberty Property Trust |
LRY |
S&P 400 |
78.0 |
85.3 |
| New Plan |
NXL |
S&P 400 |
77.5 |
84.4 |
| Apartment Investment & Management Co. |
AIV |
Russell 3000 |
90.9 |
83.0 |
| iStar Financial Inc. |
SFI |
Russell 3000 |
88.1 |
79.5 |
| Plum Creek Timber Company, Inc. |
PCL |
S&P 500 |
48.5 |
79.5 |
| Host Marriott Corp. |
HMT |
Russell 3000 |
82.6 |
74.1 |
| ProLogis |
PLD |
Russell 3000 |
79.4 |
72.3 |
| Public Storage, Inc. |
PSA |
Russell 3000 |
78.9 |
71.9 |
| Chelsea Property Group, Inc. |
CPG |
Russell 3000 |
74.5 |
67.9 |
| Boston Properties Inc. |
BXP |
Russell 3000 |
71.3 |
64.3 |
| Regency Centers Corp. |
REG |
Russell 3000 |
70.9 |
63.4 |
| Vornado Realty Trust |
VNO |
Russell 3000 |
69.5 |
62.1 |
| Hospitality Properties Trust |
HPT |
S&P 400 |
35.9 |
61.2 |
| Kimco Realty Corp. |
KIM |
Russell 3000 |
57.6 |
54.9 |
| Friedman, Billings, Ramsey, Group, Inc. |
FBR |
Russell 3000 |
50.1 |
47.8 |
| Archstone-Smith |
ASN |
Russell 3000 |
49.9 |
47.3 |
| The Macerich Co. |
MAC |
Russell 3000 |
26.8 |
30.4 |
| Developers Diversified Realty Corp. |
DDR |
Russell 3000 |
23.0 |
26.8 |
|
Source: Institutional Shareholder Services’ Corporate Governance Rankings as of April 23, 2004.
Note: ISS does not cover Brookfield Properties Corporation. Each company has two scores: one relative to an index and one relative to an industry. The scores are percentiles and range from 0% to 100%. To calculate each company’s score, ISS gathers data based on 61 issues in eight categories, and applies its formula to reach a CGQ rating. For more information, visit www.isscgq.com. |
| Average Governance Rankings By Industry |
| Industry Group |
Average Index CGQ |
| Banks |
62.7 |
| Utilities |
61.7 |
| Real Estate |
57.6 |
| Pharmaceuticals & Biotechnology |
56.5 |
| Capital Goods |
55.4 |
| Materials |
54.8 |
| Energy |
53.8 |
| Insurance |
52.2 |
| Average of Index CGQ |
51.0 |
| Technology Hardware & Equipment |
50.4 |
| Health Care Equipment & Services |
50.2 |
| Transportation |
49.4 |
| Diversified Financials |
47.6 |
| Software & Services |
47.4 |
| Commercial Services & Supplies |
46.9 |
| Consumer Durables & Apparel |
45.7 |
| Food & Staples Retailing |
43.8 |
| Retailing |
43.6 |
| Hotels Restaurants & Leisure |
43.1 |
| Food Beverage & Tobacco |
42.6 |
| Household & Personal Products |
41.9 |
| Automobiles & Components |
41.1 |
| Telecommunication Services |
39.7 |
| Media |
34.4 |
| Source: Institutional Shareholder Services |
Key Governance Ratings Criteria
REITs vs. Corporate America |
| Rating Criteria |
REIT
Percentage |
All Companies
Percentage |
Difference |
| Governance guidelines are publicly disclosed |
90.0% |
27.4% |
62.6% |
| Performance of the board is reviewed regularly |
86.7% |
28.9% |
57.8% |
| Outside directors meet without the CEO |
83.3% |
26.4% |
56.9% |
| Nominating Committee comprised solely of independent outside directors |
86.7% |
40.5% |
46.2% |
| Policy disclosed regarding auditor rotation |
53.3% |
21.6% |
31.7% |
| Directors are subject to stock ownership requirements |
33.3% |
10.0% |
23.3% |
| CEO is listed as having a “related-party transaction” in the proxy statement |
43.3% |
22.5% |
20.9% |
| Executives are subject to stock ownership guidelines |
30.0% |
10.2% |
19.8% |
| Options grants align with company performance and the burn rate is reasonable |
40.0% |
20.5% |
19.5% |
| Compensation Committee comprised solely of independent outside directors |
86.7% |
68.8% |
17.9% |
| Audit Committee only has independent outsiders |
93.3% |
79.4% |
13.9% |
| Options grants align with company performance but the option grant rate is higher than peers |
46.7% |
33.9% |
12.7% |
| Board controlled by a supermajority of independent outsiders (75% < IO <= 90%) |
36.7% |
31.4% |
05.2% |
| Board controlled by a supermajority of independent outsiders (66.7% < IO <= 75%) |
13.3% |
10.6% |
02.7% |
| Non-audit fees exceed audit fees |
10.0% |
07.9% |
02.1% |
| All stock-incentive plans adopted with shareholder approval |
86.7% |
84.7% |
02.0% |
| Board controlled by a majority of independent outsiders (50% < IO <= 66.7%) |
40.0% |
38.2% |
01.8% |
| All directors with more than one year of service own stock |
90.0% |
88.8% |
01.2% |
| Board has the express authority to hire its own advisors |
68.5% |
68.5% |
0.0% |
| Fees paid to auditors are strictly audit fees |
20.0% |
20.0% |
-00.0% |
| Dual class capital structure with unequal voting rights |
06.7% |
07.0% |
-00.4% |
| Directors with more than one year of service own no stock |
10.0% |
11.2% |
-01.2% |
| Board controlled by a supermajority of independent outsiders (IO > 90%) |
0.0% |
03.7% |
-03.7% |
| Classified board |
50.0% |
54.4% |
-04.4% |
| Chairman and CEO are separated |
43.3% |
48.0% |
-04.7% |
| Auditors ratified at most recent annual meeting |
50.0% |
61.7% |
-11.7% |
| Options grants do not align with company performance |
13.3% |
45.6% |
-32.3% |
Note: Items in red are negative relative to the rest of the CGQ coverage universe.
Source: Institutional Shareholder Services |
Paul Wanner is the business development manager of the Corporate Governance Quotient with Institutional Shareholder Services.
REITs Get the Bronze for Governance