Board independence, ownership structure and performance: evidence from real estate investment trusts

REITs experienced phenomenal growth in the l990s. Evidence on ownership structure, board composition and performance of REITs, however, is scarce. For REITs, special regulation, including mandatory distribution of income, limits free cash flow, while restrictions on source of income and asset structure results in widely dispersed stock ownership. This makes external monitoring through the takeover market less likely such that alternative monitoring mechanisms, including external directors, must be in place to discourage deviant managerial behavior. Using a simultaneous equation system, we conclude that while outside directors on REIT boards enhance performance, the effect is weak. Consistent with the evidence on other industry sectors, we find that higher CEO stock ownership and control through tenure and chairmanship of the board reduces the representation by outside members on REIT boards, and adversely affects REIT performance. Institutional ownership or blockownership fails to serve as alternate disciplining mechanism to (inadequate) monitoring by outside board members, although their presence seems to enhance performance