Much of the decline in the industry average Index CGQ score owed to changes from 2007 to 2008 in the composition of companies included in the ratings process. Specifically, 34 companies included in 2007 but not included in 2008 had an average Index CGQ of 48.9, whereas 17 companies that were not included in 2007 but were included in 2008 had an average Index CGQ of 40.4.

As in prior years, the relative strengths and weakness of the real estate companies have not changed. Real estate companies are more progressive than most industries across all categories, but are especially less likely to adopt takeover defenses or obstruct shareholder rights.

Two weaknesses cited in RiskMetrics’ annual review of real estate companies’ governance practices are the higher-than-average incidence of related-party transactions and a higher-than-average option grant burn rate. Last year RiskMetrics noted that the percentage of real estate companies having excessive option grant burn rates fell from the prior year (from 21.6 percent to 16.6 percent). Although a relatively negligible difference, this year 19 percent of real estate companies had excessive burn rates, compared to 17.3 percent of all U.S. companies.

The number of real estate companies disclosing no related-party transactions involving the CEO rose sharply from April 2007 to April 2008—from 62.7 percent to 82.5 percent. The number of real estate companies disclosing no related-party transactions involving officers and directors other than the CEO also climbed sharply—from 47.9 percent to 69 percent.

Board & Key Committee Independence

In markets characterized by broadly dispersed shareholdings and relatively few large block holders, CGQ heavily weights the rating factors relating to board and committee independence. RiskMetrics/ISS Governance Services policy deems that a high percentage of independent, non-executive directors on boards and committees is an appropriate check and balance on the CEO and management.

Real estate companies continue to have a higher percentage of independent outsiders than do other industries serving on boards. In fact, the favorable differences between the real estate sector and other industries having fully independent nominating, compensation and audit committees are even more pronounced. Compared to other industry groups, 13 percent more real estate companies have fully independent nominating committees, 6 percent more real estate companies have fully independent compensation committees and 3 percent more real estate companies have fully independent audit committees. Additionally, 14 percent more real estate companies disclosed the existence of a governance committee and the number of times it met.

Top 50 Real Estate Companies, Ranked By Industry CGQ
Company Name	Ticker	Industry CGQ
Developers Diversified Realty Corp.	DDR	100
Regency Centers Corp.	REG	99.5
AMB Property Corp.	AMB	99
Parkway Properties, Inc.	PKY	98.5
U-Store-it Trust	YSI	98.1
Apartment Investment & Management Co.	AIV	97.6
The St. Joe Company	JOE	97.6
Rayonier Inc.	RYN	96.6
Highwoods Properties, Inc.	HIW	96.1
UDR, Inc.	UDR	95.6
BRE Properties, Inc.	BRE	95.1
Duke Realty Corporation	DRE	94.7
Pennsylvania Real Estate Investment Trust	PEI	94.2
Ventas, Inc.	VTR	93.7
Plum Creek Timber Company, Inc.	PCL	93.2
Acadia Realty Trust	AKR	92.7
ProLogis	PLD	92.2
Cousins Properties Inc.	CUZ	91.7
Colonial Properties Trust	CLP	91.3
Liberty Property Trust	LRY	90.8
Equity Residential	EQR	90.3
Brandywine Realty Trust	BDN	89.8
Nationwide Health Properties, Inc.	NHP	89.3
Rait Financial Trust	RAS	88.8
PS Business Parks, Inc.	PSB	88.3
Entertainment Properties Trust	EPR	87.9
Lasalle Hotel Properties	LHO	87.4
CB Richard Ellis Group Inc	CBG	86.9
HCP Inc.	HCP	86.4
Felcor Lodging Trust Incorporated	FCH	85.9
First Potomac Realty Trust	FPO	85.4
Federal Realty Investment Trust	FRT	85
Northstar Realty Finance Corp	NRF	84.5
EastGroup Properties, Inc.	EGP	84
Anworth Mortgage Asset Corp.	ANH	83.5
National Retail Properties, Inc.	NNN	83
Cedar Shopping Centers, Inc.	CDR	82.5
Diamondrock Hospitality Company	DRH	82
Health Care REIT, Inc.	HCN	81.6
Taubman Centers, Inc.	TCO	81.1
American Campus Communities, Inc.	ACC	80.6
Corporate Office Properties Trust, Inc.	OFC	80.1
Lexington Realty Trust	LXP	79.6
DCT Industrial Trust Inc.	DCT	79.1
Redwood Trust, Inc.	RWT	78.6
Simon Property Group, Inc.	SPG	78.2
Getty Realty Corp.	GTY	77.7
Post Properties, Inc.	PPS	77.2
American Financial Realty Trust	AFR	76.7
Jones Lang LaSalle, Inc.	JLL	76.2
Source: RiskMetrics Group as of June 2, 2008
Calculating Scores To calculate an Index CGQ score, the points awarded to a company for each one of its rating factors first are added together to create a *raw* score. To then calculate an Index CGQ score, companies in the same market cap index group are sorted by their raw scores from highest to lowest and then transformed into percentiles, which represent the relative Index CGQ scores. The company with the highest raw score in a group receives a percentile score of 100, while the company with the lowest raw score receives a 0. The industry average Index CGQ*the final measure used to create industry rankings*is then the average of the Index CGQ percentile scores.

Board Practices

The CGQ ratings factor in a number of governance practices related to the board of directors, encompassing issues such as attendance, overboarding, ability to hire outside directors, disclosure of governance guidelines and the roles of the chairman and CEO. Examination of these practices can help investors determine if companies have the appropriate checks and balances in place at the board level. The real estate industry far outperforms other industries in this category of governance practices.

Companies in the real estate industry are more likely than the average of all industries to have board-approved CEO succession plans in place (73.5 percent to 56.9 percent), to perform annual board performance evaluations (81 percent to 69.1 percent), to post governance guidelines on the company Web site (75.5 percent to 48.4 percent), to disclose the number of executive session meetings of the board (76 percent to 51.7 percent) and to require directors to submit a resignation letter (40.5 percent to 26.5 percent). Historically, the real estate industry has been out in front on these issues.

Takeover Defenses/Shareholder Rights

The takeover defense and shareholder rights practices of the real estate industry are generally aligned with the practices of other U.S. companies. In a few areas deemed important by the RiskMetrics ratings team, real estate companies have superior practices. For example, only 18.5 percent of real estate companies have adopted poison pills, compared to 26.6 percent of all U.S. companies (these numbers have been dropping for all U.S. companies over the past few years).

Additionally, 59 percent of real estate companies have annually-elected boards, compared to 51 percent of all U.S. companies. Eighty percent of real estate companies allow shareholders to call special meetings—much higher than the 46.6 percent of all U.S. companies that do so. The single most heavily weighted negative factor in the CGQ methodology is for companies with more than one class of stock where one of the classes of shares has supervoting rights. CGQ classifies 4.7 percent of the 5,000 companies it evaluates as having a dual-class capital structure with one class having supervoting rights. Only 2.5 percent of real estate companies have such structures.

Compensation & Ownership

Compensation and ownership-related practices can reveal whether the interests of shareholders and managers are aligned, and whether the board is an effective check on management. CGQ rates companies on the aggregate officer and director stock ownership percentage, whether all directors with more than one year of service on the board own stock, and whether directors are paid at least partially in stock. On the compensation side, CGQ rates companies on whether the option grant burn rate is excessive or reasonable, on compensation plan costs, on the disclosure of the thresholds required for incentive payments to be made and whether officers and directors are subject to minimum stock ownership requirements. The compensation and ownership factors are heavily weighted in the CGQ methodology.

The real estate industry remains fairly aligned with the U.S. market as a whole in the compensation and ownership category. Twenty-two percent of real estate companies subject their executives to stock ownership requirements—the percentage is the same for all U.S. companies. A higher percentage of real estate companies subject directors to stock ownership requirements—28.5 percent—compared to 24.1 percent of all U.S. companies. Slightly more real estate companies (19 percent) have excessive option grant burn rates relative to all U.S. companies (17.3 percent), but this difference is negligible. More than 20 percent of real estate companies disclose the performance hurdles of their incentive plans, compared to only 16 percent of all U.S. companies.

Audit Factors

A higher percentage of real estate companies have audit committees comprised solely of financial experts than the all-company universe (24 percent to 16.3 percent). More real estate companies also disclose that more than one member of the audit committee is a financial expert, but these statistics are of limited value because many committees do not list all financial experts as financial experts, as not all of these directors want the liability of being listed as such.

Overall, the real estate industry has demonstrated above-average performance in the CGQ ratings.

Paul Wanner is director of governance ratings with RiskMetrics Group.

Editor’s Note: A new ratings methodology will be released next year which will rate all companies across the world using the same ratings methodology. Currently there are separate methodologies for U.S. and non-U.S. companies. The new methodology will examine shareholder rights and compensation issues in greater detail, and take into account the distinctive governance practices in different markets.

¹ RiskMetrics in 2007 acquired Institutional Shareholder Services, which tracked these results last year.