Activists continue to build a case for change across a broad range of issues, including operational performance strategic direction, asset concentration and allocation, conflicts of interest, and corporate governance.
Our analysis identified five REIT-specific themes that are intended to maximize shareholder value:
1. Corporate governance — electing alternative or independent directors, improving board representation, and reducing control over shareholder’s voting power
REITs continue to mirror broader market trends in the area of increased proxy access and investor communications. Proxy disclosures are an efficient way to take the company’s targeted governance message to a broad audience of investors.
Strengthened board composition is another arear of particular focus. We’ve found that investors across all industries want every board member to take an active role and contribute constructively to the companies’ governance and decision-making process. Furthermore, shareholders are demanding that board members represent investors’ views fairly and equitably.
2. Shareholder rights — enforcing fiduciary rules, eliminating dual-class stock structure, and opting out of the Maryland Unsolicited Takeovers Act (MUTA)
Shareholders’ rights and provisions are a fundamental requirement for the ultimate owners of a company. Activist investors look to eliminate structures that impose restrictive practices or limits on the ability of all owners to vote on the future direction of the company. Opting out of MUTA gives REIT boards a powerful tool to thwart change without consulting shareholders.
3. Management structures — reviewing management structure, compensation and termination fees
Externally managed vehicles have historically been plagued by concerns over alignment and fee structures, which are accentuated by perceived conflicts of interest. Whether warranted or not, activists have targeted these structures, given their view that they do not align management and shareholders as well as an internally advised model.
4. Strategic direction — reviewing capital allocation and investment strategy
Disagreements between shareholders and management over strategic direction are nothing new, but activists tend to challenge strategy in a more public manner. Evolving market dynamics and advances in building design, construction and operational efficiency will fundamentally redefine the way tenants in all industries use real estate.
For management teams and boards unable to stay abreast of rapidly evolving trends, the risk of asset obsolescence is very real, with negative implications for portfolio value and the business generally. Optimizing long-term capital allocation strategies is especially important to REITs. Investors are demanding better clarity on decisions made — and how they are made — that support corporate strategies.
5. Alternative strategies — exploring potential sale, merger, privatization and spinout; forcing or opposing sale; and exploring share buyback and debt reduction
Although shareholder activists commonly recommend alternative strategies, companies need to understand the views of their major shareholders. Our research shows that investors across all industries believe that many companies are focused on the short term; and for a variety of reasons, including short-sighted management, high-frequency trading, quarterly research demands and the media.
Some investors acknowledge they are partly to blame for the focus on the short term. Nevertheless, activists’ intentions and broader investor support remain as critical issues for a management team to understand when an activist begins agitating for change. Just because an activist group states they have talked to shareholders, it does not mean those shareholders necessarily agree.
Looking at the business from a shareholder perspective
Activist shareholder campaigns are very often a force for positive change, but the process of accomplishing this change can be highly disruptive to a REIT’s day-to-day activities. An effective practice is for companies to view themselves through the lens of a shareholder group in order to identify areas for improvement.
REIT activists’ demands for engagement continue to reflect the wider trend in corporate America of institutional investors reshaping the corporate governance landscape and challenging how boards think about fundamental issues, such as strategy, risk, capital allocation and board composition.
REITs are responding to investor demands by engaging more often and more directly with shareholders in an effort to improve transparency and accountability.
Turning a critical eye inward toward the business is a vital practice. Scrutinizing the business through the eyes of an activist may ultimately lead to changes that maximize shareholder value.
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Summary
REIT activists’ demands reflect the wider trend of institutional investors reshaping the corporate governance landscape and challenging how boards think about fundamental issues, such as strategy, risk, capital allocation and board composition. REITs are responding to investor demands by engaging more often and directly with shareholders in an effort to improve transparency and accountability.
