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Foreign Exchange
Corporate governance standards in listed property companies diverge widely across Europe, according to a study released by the European Public Real Estate Association (EPRA).
The study reports an EU corporate average ranking of 9.73 out of a possible top mark of 16. "You could say European property companies just about get a pass based on a minimum standard of achieving 60 percent of our criteria," says EPRA CEO Philip Charls.
The study, which examined the 2006 annual reports and other publicly available data from more than 100 companies that are constituents of the FTSE EPRA/NAREIT Index covering developed Western European markets, analyzed various corporate governance criteria such as executive compensation linked to performance, disclosure standards, and board structure and composition.
A key determinant of corporate governance quality in the report was the link between managerial compensation and performance and/or stock value. "This is one factor where we have really consistent evidence that if you don't link compensation and performance, then you produce poor results for shareholders," says Erasmo Giambola, Assistant Professor in the Finance Group of the University of Amsterdam and the author of the EPRA report. "It is strikingly clear in one European market where this link is poor to non-existent and company performance is also weak."
The perceived independence of the company's board was another driver in judging governance performance. The report showed that 32 percent of the firms in the EPRA survey have adopted a two-tier board structure, which is based on a clear separation between the management board and the supervisory board. Some 24 percent use the unitary system, which allows executives to sit on the supervisory board and is seen as less independent. The remaining 44 percent of real estate firms in the survey have a hybrid structure that combines some of the characteristics of the two-tier system with those of the unitary system.
The biggest real estate markets generally scored the best, the survey revealed, with the UK, the Netherlands and Switzerland leading the list of countries surveyed. Each of those countries scored above 10, although with a score of 10.62, even the highest ranked country, the UK, achieved only 66 percent of the criteria on average. France, Belgium, Italy, Austria, Germany and Greece fell below the study average, with scores ranging from 9.57 to 5.78, below the 60 percent passing mark.
"In some countries such as the UK, there was a huge variance in rankings, with some companies achieving a rating of 14 or higher and others as low as two," noted EPRA researcher Ali Zaidi.
While this fact made conclusions about the overall performance in each country difficult, the study left no doubt that there is much room for improvement in corporate governance standards. "There is clearly some way to go in terms of improving corporate governance at European real estate companies," Charls concludes. "We think firms should aim to achieve at least 80 percent of the maximum to improve transparency in their operations and to attract more investment capital flows."
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