There is no question today that the real estate industry still has somewhat of a black eye across the national, and even international, economic community. The industry has always been cyclical, and unfortunately, this most recent cycle has probably been the worst.

To be better prepared for the future, one way for a public company to safeguard against these recurrent problems is to have outstanding real estate representation on its board of directors. In an effort to study this subject, FPL Associates (FPL) analyzed those public companies with the greatest exposure to real estate, in hopes of drawing some, general conclusions.

Seventy-two of the larger public companies, which had a significant exposure to, or investments in, real estate, were evaluated. Seven industry categories were selected: retail, hotel, commercial banking, thrifts, insurance companies and "all other." The "all other" category included institutions such as the Federal National Mortgage Association, as an example.

It is important to discuss the rationale behind the selection of each of these categories. First of all, retailers have been significant players in real estate through store development. In fact, many of the highly publicized retail bankruptcies have been the result of retailers being overleveraged, with their real estate serving as collateral. Unfortunately, in most cases, the retail operating businesses could not support the debt. Relative to hotels, most properties have been owned and managed by developers. Like retail, the hotel business is by location, services and quality.

Due to the downturn in the real estate markets, many financial institutions such as thrifts, banks and insurance companies have become owners of non-performing real estate. Some insurance companies have always been real estate equity investors, either for their own general accounts or as pension advisers. For many lenders, these ownership positions have required them to absorb significant financial losses, and in some cases, especially for the thrifts, have jeopardized their long-term viability.

Many of the large homebuilders are publicly traded. Like all other segments of the real estate industry, they have had their share of bankruptcies, due to a number of circumstances. First of all, many have become significant investors in commercial real estate. Secondly, many homebuilders speculated by purchasing large land parcels, and then when the regional economies soured to the point where new home sales dropped dramatically, the carrying cost of the land put many of them under significant financial stress.

The last category represents the large industrial/service companies which have estate exposure from two perspectives. First of all, organizations such as General Electric, IBM and American Express have exposure either through an ownership position or leasing liability. Secondly, corporate pension plans have approximately $50 billion invested in either equity real estate or hybrid debt and mortgages. Today, these funds are managed by third-party advisers.

As part of FPL's analysis, all corporate officers, who are board members and also real estate professionals, were not included as representatives of the real estate community. Secondly, there is no intent to correlate either corporate or real estate performance with real estate representation on the board of directors. However, there are at least two noteworthy observations. First, there is more real estate representation on boards of directors than anyone might have initially guessed. Secondly, many of the institutions which are experiencing (or could experience) real estate difficulties, are under-represented relative to real estate professionals in their boards of directors.

Of the 72 publicly held companies in the study, 26 (36% of the sample) had outside directors representing the real estate industry. Alternatively, of 1,025 board members of the 72 institutions, only 38 (or 4%) represented the real estate industry.

FPL analyzed which of the eight industry sectors had the most real estate representation on its collective board of directors. Within the hotel industry, 67% of the companies had at least one outside board member with real estate expertise. At the bottom of the list is the insurance industry, with only 13% of the insurance companies surveyed having at least one outside board member with real estate expertise.

As part of the study, FPL also analyzed those industry segments with the highest representation of outside real estate expertise. The results closely correlated with the findings of our earlier analysis. For example, of all the external board members of publicly traded hotel companies, 2 1 % represented the real estate industry. At the other end of the spectrum, only 2% of all the external board members for insurance companies represented the real estate industry.

It is clear from our research, that the real estate industry is represented on many corporate boards of directors. However, our sense is that these individuals were not selected as much for their real estate expertise, as they were because of their relationships with other members of the respective company's board of directors. However, over the last three years, these peoples' advice on real estate has probably been very beneficial for the companies they serve.

Secondly, it is critically important for the banks, insurance companies and manufacturing/service organizations to ask themselves whether they are under-represented on their boards of directors relative to real estate expertise. In a subsequent study, FPL will not only analyze the backgrounds of those real estate executives currently serving on public boards of directors, but more importantly, will offer observations on the type of background appropriate to make the most significant contribution to a public board. Suffice it to say that the boards of directors of banks, insurance companies and manufacturing/service organizations need to carefully re-evaluate whether they should have real estate representation on their board, especially given most of these companies' exposure to real estate, and the potential impact of this exposure on shareholder value.

William J. Ferguson is co-chairman and CEO of Chicago-based FPL Associates, which provides consulting services for boards of directors, CEOs and senior management of financial institutions and organizations. FPL is a United Advisory Services company.