Corporate Finance Institute®

5 Ps of Corporate Governance
Company Analysis
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Brief:
You’re an analyst being asked to assess corporate governance performance for two rival
companies. Your firm is considering investments in one (or even both) of these two
businesses, and you’ve been tasked with specifically identifying any potential governance
risks or red flags. The companies are quite similar in terms of their business model, annual
profits, and size. They are also both publicly listed on a hypothetical stock exchange, for
which you’ll be given several assumptions.

Additional Information:
Both companies are in the commercial real estate industry and are both specifically REIT’s
(real estate investment trusts). You have the following information to inform your
assessment:

1. Abbreviated investor decks for both companies

2. Some industry specific information and assumptions (including ESG factors),
as follows:
• Real estate is one of the most vulnerable asset classes to physical climate
risks.
• Material issues for the industry include*:
• Energy management
• Carbon emissions
• Water stewardship,
• Waste management.
• Assume that both companies are publicly traded on an exchange where
board diversity rules have just been implemented. These require that a
company report on the ethnic and gender makeup of its Board of Directors.
• Companies will have one year from time of implementation to provide
an explanation as to why they do not have at least two diverse board
members currently serving on the board.
• Assume that an NPS of >50 is considered excellent in the industry.
• Assume that tenant churn of anything greater than 20% is considered
bottom quartile.

*For reference, the Real estate industry standard from the Sustainable Accounting Standards Boards
(SASB) material issues include ‘energy management’ and ‘water management’, as well as ‘management of
tenant sustainability impacts,’ and ‘climate change adaptation.’

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Exercise:

5 Ps R.E.A.L REIT Peak Performance REIT

PEOPLE • Diversity of ethnic background, • Leadership is all Caucasian

gender, and professional males with similar
experience. backgrounds in real estate
• Multi-disciplinary in and finance.
qualifications, experience, and • Does not meet stock
domain expertise. exchange’s diversity
• Meets diversity requirements of requirements; will need to
the stock exchange. “comply or explain” within
12 months.

PURPOSE • Explicit purpose reflected in • No explicit purpose beyond

name and brand. achieving superior
• Speaks to the company’s value performance and returns.
proposition – both on assets • Mission seems to lack
and ESG performance. distinct differentiation from
• Purpose and corporate strategy running the core elements
seem to be well integrated. of the business – asset
management and customer
service.
• Unclear as to the brand
promise or differentiated
value to stakeholders.

POLICIES • Policies on key material issues • No policies on material

are in place, reducing their risk issues to the industry.
exposure from supplier • Policies address aspects of
behavior, climate impacts, and broader issues yet the focus
labor abuses. is on items of less material
• DEI policy helps meet stock relevance such as corporate
exchange requirement. philanthropy and LED
• Responsible sourcing reduces lighting policy.
risk associated with • These policies provide no
troublesome suppliers. insight into enterprise risk
• Climate policy outlines position management practices or
on and approach to reducing future planning.
climate risk exposure – for

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which real estate is one of the • No mention of climate

most vulnerable asset classes change – for which real
to climate change impacts. estate is one of the most
vulnerable asset classes to
climate change impacts.
• Office recycling practices do
not produce meaningful
impact on corporate
sustainability efforts.

PROCESSES • Clear descriptions around the • Clear descriptions on

need for and process to processes but the processes
address key management appear to lack any
issues. engagement or insight with
• Materiality assessment stakeholders outside of the
indicative of adhering to ESG BOD and management
best practices. team.
• ESG supplier criteria and • The CEO hand-picked his
validation speaks to key BOD and management
processes for reducing supply team; it’s unclear if there
chain risks and associated are any independent
emissions. directors or non-insider
• Impact measurement and members to provide
reporting speaks to how the objective advisory.
company will plan, track, and • Supplier selection process is
report on its ESG performance. clear yet does not account
for any criteria beyond
getting the job done as
‘quick and cheap as
possible.’

PERFORMANCE • Given metrics (avg. CAP, • Given metrics (avg. CAP,

interest coverage, payout ratio, interest coverage, payout
and valuation) are very similar ratio, and valuation) are
to Peak Performance. very similar to R.E.A.L.
• The tenant net promoter score • The tenant retention rate
is 65%, with a score of >50 that PEAK presented is 65%,
being considered excellent. This indicating they are deep in
denotes that tenants would the bottom quartile among
competitors.

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positively recommend REAL to • By the end of the year, 15%

their friends. of PEAK’s portfolio will have
• By the end of the year, 33% of had a conversion to LED
R.E.A.L’s portfolio will have lighting.
been converted to solar • The amount of recycled
(renewable) energy. paper may appear
• They presented Scopes 1, 2, impressive at first glance,
and 3 emissions data, but paper usage was listed
demonstrating they understand as a material issue to the
the need for measuring and industry, nor is it a
reducing greenhouse gas (GHG) meaningful contributor of
emissions. emissions or associated
environmental impacts.

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Disclaimer

This document is intended solely for educational and training purposes. The information contained
herein does not constitute investment advice, or the provision of investment, tax, legal or other
professional advice. The data contained in this report is created for the students’ use to assist with
completion of course work and should not be used to perform industry data analysis for business
or investment purposes.

As with all investments, there are associated risks and you could lose money investing – including,
potentially, your entire investment. Prior to making any investment, a prospective investor should
consult with its own investment, accounting, legal and tax advisers to evaluate independently the
risks, consequences, and suitability of that investment.

No reliance may be placed for any purpose on the information and opinions contained herein or
their accuracy or completeness, and nothing contained herein may be relied upon in making any
investment decision.

This document is provided "as is". CFI Education Inc. and its affiliates have no liability arising out of
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