GOODWIN 9 for less than five years) as reported by Bloomberg. In quantifying governance results, we used the most recent “QualityScore” assigned to each REIT by ISS.9 10 The notion that the REIT market seems to depart from the generally accepted notion that “better corporate governance leads to higher relative valuations and better relative performance” has been previously noted and documented in the scholarly literature.11 While not all scholars are in agreement, a number of reasons have been posited by academics for this apparent discrepancy, including: • the regulated environment in which REITs operate (e.g., the obligation to pay out at least 90% of net earnings and operational restrictions), which may serve to limit operational freedom;12 • since REITs are highly transparent and the properties in their portfolios are relatively easy to value, there may be less scope for agency problems;13 and • investors value strong corporate governance mechanisms less in naturally strong institutional settings (such as the commercial real estate market) as opposed to weak institutional settings where deviations from corporate governance norms can prove more costly to stockholders. 2. INFLECTION POINTS: WHEN THE GOING GETS TOUGH Whatever the explanation for a perceived lack of correlation between governance and performance for public REITs, our view is that a company’s corporate governance profile is still a critical factor – albeit one of many – in making an investment decision. While the correlation data we reviewed reflects total stockholder return over a 5-year period, it does not measure or reflect something that many investors may prize above all else: the ability to influence outcomes at an inflection point that may possibly involve a fundamental corporate transaction. For example, a REIT with a classified board and plurality voting, which does not afford proxy access to stockholders, or the right to remove directors without cause, or the right to amend the bylaws – that kind of governance profile may make it more difficult for stockholders to be heard at a time when the company may be facing a strategic crossroads. A board and management team that is insulated from stockholders may be less incentivized to make strategic decisions based solely on maximizing stockholder value over the long term. On the other hand, a REIT whose directors are all elected annually, has opted out of MUTA and committed to not adopt a stockholder rights plan, has adopted a liberal form of proxy access and ability of stockholders to directly amend the bylaws, permits the removal of directors without cause and the ability of stockholders to fill vacancies on the board – that kind of governance profile can make it very difficult for the board and management to exercise their good faith fiduciary duties for the benefit of all stockholders (not only those most interested in event-driven volatility), arguably restricting the board’s ability to be thoughtful stewards of long term stockholder value when it matters most. 3. CONCLUSION: THE RIGHT APPROACH We do not sense that REITs as a whole have over- reacted to growing chorus of calls to improve corporate governance, nor do we believe that the REIT market governance “equilibrium” is off-kilter. We believe that the right approach in corporate governance is a subjective, case-by-case analysis, rather than a check- the-box list comparison of “good” vs. “bad” governance features. At any given time we believe that each REIT board should assess their company’s individual governance profile in light of all facts and circumstances then relevant to that particular sector and particular company. Moreover, since more permissive corporate governance for REITs does not translate automatically 9 We used the most recent QualityScore assigned by ISS to each REIT, rather than a form of trailing 5-year average, to ensure that the governance scores were “apples to apples” as applied to each company. We appreciate that this may impact correlation data for those REITs whose corporate governance scores have changed significantly during the sample period. 10 ISS’ determination of its QualityScore for each REIT includes ISS’ evaluation of executive compensation. To ensure that the compensation component of the QualityScore was not disproportionately affecting the results of the correlation analysis, we also completed scoring for each REIT based solely on the 18 corporate governance metrics discussed above in the table (which do not include executive compensation). We found that the correlation results were substantially similar as between ISS’ QualityScore and the pure-corporate governance scoring. 11 See, e.g., Bianco, C., C. Ghosh and C.F. Sirmans. 2007, The Impact of Corporate Governance on the Performance of REITs, Journal of Portfolio Management 33: 175– 191; Bauer, R., Eicholtz, P. and Kok, N., 2010, Corporate Governance and Performance: The REIT Effect, Real Estate Economics, Volume 38, Issue 1, pages 1–29. 12 For example, Bauer, Eicholz and Kok, 2010, found that the relationship between governance and performance increased in the subsample of REITs that had relatively low payout ratios and therefore large discretionary cash flows. 13 In the context of public companies with a much lower percentage of fixed assets (e.g., technology companies), we note the recent statement from FTSE Russell to the effect that it plans to consult with investors and other stakeholders over the next few months about whether to include in its indices companies whose publicly-held shares have no voting rights. https://www.wsj.com/articles/index-firms-take-issue-with- nonvoting-rights-1491739227.