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European real estate firms show wide variance in corporate governance, says Epra

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Corporate governance standards in listed property companies vary widely across Europe, according to a study released by Epra, the Amsterdam-based European Public Real Estate Association.
Corporate governance standards in listed property companies vary widely across Europe, according to a study released by Epra, the Amsterdam-based European Public Real Estate Association.

‘With the EU corporate average ranking at 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 per cent of our criteria,’ says Epra chief executive Philip Charls.

The study, entitled Corporate Governance of European Listed Property Firms, examined the 2006 annual reports and other publicly available data from more than 100 companies that are part of the FTSE Epra/Nareit Index covering developed Western European markets. The study will be repeated annually in order to provide a benchmark against which to measure annual improvement at the company and market level.

The report analysed 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 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, you produce poor results for shareholders,’ says Erasmo Giambola, an assistant professor in the finance group of the University of Amsterdam and the author of the 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 found that 32 per cent of the firms surveyed have adopted a two-tier board structure, based on a clear separation between the management board and the supervisory board.

Some 24 per cent use a unitary system, which allows executives to sit on the supervisory board and is seen as less independent. The remaining 44 per cent of real estate firms in the survey have a hybrid structure that combines some of the characteristics of the two-tier and unitary systems.

The biggest real estate markets generally scored the best, the survey found, with the UK, the Netherlands and Switzerland leading the countries surveyed. Each scored above 10, although even the highest ranked country, the UK, scored only 10.62, meeting on average 66 per cent of the criteria. France, Belgium, Italy, Austria, Germany and Greece fell below the average, with scores ranging from 9.57 to 5.78.

‘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,’ says Epra researcher Ali Zaidi. While this made conclusions about overall performance in each country difficult, the study left no doubt that there is much room for improvement.

‘There is clearly some way to go in terms of improving corporate governance at European real estate companies,’ Charls says. ‘We think firms should aim to achieve at least 80 per cent of the maximum to improve transparency in their operations and to attract more investment capital flows.’

Epra has more than 200 active members with more than EUR300bn in real estate assets and 85 per cent of the market capitalisation of the FTSE Epra/Nareit Europe Index. The association seeks to encourage greater investment in listed real estate companies in Europe through provision of better information to investors, improvement of the general operating environment and encouragement of best practices.

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