CORPORATE GOVERNANCE TRENDS IN THE PUBLIC REIT SECTOR: AN EVOLVING LANDSCAPE 8 1. IMPACT OF GOVERNANCE ON PERFORMANCE: ANALYSIS Looking further at the data set forth above for each constituent member of the RMZ, and comparing the governance data to each company’s historical performance – we found that the line between corporate governance and total shareholder return is not a straight one. To state the obvious, the “best” or “blue ribbon” corporate governance practices cannot overcome chronic underperformance on business fundamentals relative to a peer group. Conversely, numerous public REITs have consistently outperformed their peers over the long term, while also consistently scoring on the low end of the various quotients and metrics used by advisory firms to measure corporate governance. In fact, the data appears to show that REITs with higher scores in corporate governance do not, as a rule, outperform their peers with lower scores (or vice-versa) – there are simply too many other factors at play that more directly affect performance. In studying the relationship between governance and performance, we reviewed correlation data (as calculated by Microsoft Excel’s built-in correlation formula) between the stated governance metrics and performance. To measure performance, we used 5-year annualized total shareholder return (or such shorter period if the REIT has been public Stockholders Can Amend Bylaws. Proxy advisory firms have recently focused on the ability of stockholders to directly and unilaterally amend a company’s bylaws. While for many REITs incorporated in Maryland, the right to amend the bylaws continues to be vested exclusively in the board of directors, 2017 and early 2018 has seen a steady stream of REITs adopting bylaw provisions giving stockholders the right to amend the bylaws alongside the board. The terms of these provisions vary, with some REITs imposing minimum share ownership thresholds on proposing stockholders. As a point of reference, across all public companies over the past five years, only 14 proposals seeking binding bylaw amendments have been submitted by stockholders, including three or fewer in each of the last five years.7 Supermajority Vote Required to Remove Directors. For REITs with this supermajority requirement, the vote of a simple majority would not be sufficient to remove a sitting director. Require Stockholder Approval to Classify Board. Unless a company has affirmatively opted out of its provisions, the Maryland Unsolicited Takeover Act (“MUTA”) permits Maryland REITs to unilaterally elect to classify their boards, notwithstanding any contrary provision in their charter or bylaws.8 Of the 121 RMZ-member REITs organized in Maryland, 40 (or approximately 33%) have opted out of MUTA to date. In addition, a further 31 members of the RMZ are organized in jurisdictions other than Maryland and generally may not stagger their boards without stockholder approval. Exclusive Forum Provision. A sizable minority of REITs have adopted bylaw provisions that require stockholder derivative and similar law suits to be brought in a specific forum, typically the jurisdiction of incorporation. The intent behind these provisions is to ensure that any such litigation be handled as efficiently as possible. Related-Party Transactions. These are business transactions entered into by a company with its own CEO or other members of its board of directors, including persons or entities affiliated with its CEO or other members of the board. Dual Class Voting Structure. A small number of REITs maintain a dual-class voting structure whereby pre- IPO investors or sponsors hold a class of “high vote” stock that commands a disproportionately higher voting power than the class of stock held by the investing public. In most of these situations, the dual- class structure was implemented to permit holders of operating partnership units to vote their full economic interest at the parent REIT level. 7 2017 Annual Corporate Governance Review, Georgeson, available at http://www. 8 In addition, MUTA permits public REITs incorporated in Maryland, notwithstanding any contrary provision in their charter or bylaws, to (i) require a two-thirds super- majority vote requirement for removing a director; (ii) require that the number of directors be fixed only by vote of the directors; (iii) require that a vacancy on the board be filled only by the remaining directors; and (iv) require that no less than a majority of stockholders may call a special meeting of stockholders. Most REITs organized in Maryland have opted out of the state’s other two primary anti-takeover statutes, the “business combination” and “control share acquisition” provisions of the Maryland General Corporation Law.