Getting Real Estate on the Boardroom Agenda
All businesses need real estate to operate from, be it leased or owned, large or small, specialised or generic. In many businesses real estate represents a large, if not the largest, component of assets and one of the longest term liabilities reflected in the company balance sheet.
However, as most landlords and real es-tate practitioners have come to realise in their negotiations, the real estate decision hierarchy and process in companies varies dramatically. This variation can be across industries, across sectors and particular-ly across the sizes and maturity levels of companies. The Corporate Real Estate (CRE) responsibility reports through various functionalities within differ-ent company structures to the boardroom.
Today’s business operating environment is ever-changing, and common wisdom dic-tates that businesses need to be agile to avoid risks or to pursue new and emerging opportunities. But this required agility is contrary to the very nature of real estate and the way the real estate markets work. By their nature, real estate assets are long-term and lumpy, whether owned or leased.
It has been suggested that, if business leaders approach their real estate require-ments and commitments innovatively, they can provide a competitive advantage. This is a different perspective to treating real estate commitments merely as corporate encum-brances and overheads. Whether real estate is viewed as key strategy components, or as corporate overhead costs to be minimised relentlessly, is often dependent on the re-porting lines through to the boardroom.
So what is the impact of different CRE reporting lines within a company and, in particular, how does the CRE strategy mes-sage get time at boardroom discussions?
Chief Executive Officer (CEO)
It is unusual for the CEO to take primary responsibility for real estate strategy and decisions other than in the overall role as the leader of the company. In small- to medium-sized companies, the CEO (who may also be the founder) usu-ally has a strong affinity for, and love of, real estate. However, in larger companies, if the CEO continues to remain too close to real estate decisions while not focusing on the core business needs, issues may emerge.
Some interesting anecdotes exist with the CEO being too involved in the development of a great new corporate head office build-ing while the company itself has continued to spiral downward with a dismal performance. In other companies where the CEOs are too close to real estate, they are often tempted to start dabbling in real estate developments using the balance sheet and lease covenants of the business – often to the detriment of the companies.
Chief Financial Officer
Probably the most frequent reporting struc-ture is the real estate function reporting to the CFO. Obviously, with this reporting structure, the key focus of any real estate decision will be the impact on the company financial statements. Minimising recurrent real estate costs and also maintaining the optimum company capital structure, particularly with the re-lease of capital tied up in lazy real estate assets, is going to dominate the decision-making process. It is likely that real estate will at times receive the necessary attention in the boardroom, but financial considerations such as least cost options or capital-releasing lease-backs will hold sway over strategic considerations. Detailed financial and discounted cash flow analyses will form the major decision crite-ria.
Real Estate Director
In the recent business cycles, with high growth companies displaying voracious appetites for acquisitions and accommodation for new talent, the need to procure real estate rapidly saw the appointment of real estate executives to the board. Real estate was finally seen as providing a competitive advantage! Real estate was suddenly a significant board agenda item for all the right reasons.
Unfortunately, after some spectacular crashes, mainly focused in the IT industry, this status changed overnight with compa-nies having to exit significant tranches of leases at enormous cost. Real estate again became a cost-cutting exercise. Although real estate directors are still seen in some industries, internationally they tend to have reduced levels of influence.
Human Resources Director
The CRE function reports to the HR direc-tor in some organisations, although this is a relatively rare company structure. This func-tional alignment is probably relevant in organisations with large groups of knowledge workers. The focus tends to be on facilities management and the work-place environment, both from a teamwork and productivity perspective, as well as an instrument to attract the best talent. Real estate decision-making is likely to focus on real estate and the workplace as an instru-ment in the HR armoury with less emphasis on the financial analysis.
Chief Information Officer (CIO)
With the increased importance and status of IT in companies, the CIO has become a significant influence in the boardroom. In some organisations, particularly where IT and real estate are seen as interchangeable, the CIO may also have responsibility for real estate. Although this functional alignment is not frequently evident, it is probably more rel-evant in IT companies with the focus on the workplace as a portal for the IT network.
It is expected that, in this alignment, the real estate and workplace systems and da-tabases will form robust platforms for real estate decision-making and performance re-porting through to the boardroom.
Director of Corporate Services
In many companies real estate has found a new home with the emergence of broad service functions, which may also include other cor-porate services such as information technol-ogy, human resources and even finance. This structure can result in all corporate resources being treated equally in support of the corpo-rate strategy, and receiving a reasonable level of board attention. However, in reality, there is usually a bias to one of the core disciplines, dependent on the background of the person that fills the leadership position.
Sales and Marketing Director
In many retail businesses with a very strong focus on marketing and sales growth, the real estate function is closely linked to the mar-keting and sales team. Real estate and loca-tion is usually the most significant key to the sales promotion, market share and business growth. This is particularly relevant in high growth retail businesses and specifically for rolling out new retail franchises. Real estate site identification is expected to receive de-tailed discussions by the directors as a key component of continued company growth.
Chief Operating Officer (COO)
In businesses such as manufacturing and distribution it is not unusual for the real es-tate responsibilities to be a direct responsi-bility of the COO. In these businesses, effec-tive real estate location and building design are critical to productivity and profitability. These decisions are usually pivotal to busi-ness operations and strategy.
The reassignment of real estate decision-making and management to the procurement department is becoming more evident internationally. With these functional reporting lines, real estate tends to lose its status as a strategic resource providing a competitive advantage, and is treated as a commodity. The decision-making is focused on cost. The acquisition process of new real estate, whether to be owned or leased, revolves around purchasing probity and set proce-dures. Although these aspects are critical for corporate governance purposes, the strategic nature of real estate becomes neglected and seldom receives significant debate in the boardroom, with the directors believing that all things real estate are governed within the procurement process.
The decision about whether real estate can bring strategic advantage to a company or should be treated as a cost to be mini-mised relentlessly, continues to challenge the minds of company leaders. Recent international trends have seen a number of large com-panies, particularly in the financial sector, disband real estate groups and reallocate the real estate function to the procurement department. This is probably a strategy to drive down recurrent costs, ensure procure-ment probity and reduce internal resources. The longer-term legacies of these decisions are still to be played out into the future. With a whole range of reporting lines within businesses, the status of real estate in the boardroom decision-making is still var-ied and uncertain. In the meantime, the complexities of identifying where the real estate responsibility rests within specific companies and industry sectors continue to be an ongoing challenge for prospective landlords, agents and service providers.
Dave Owen CA(SA), BCom, Dip (Acc), is a member of the Coronet Global and Fellow Institute of Directors.