Commercial real estate has entered a period of market uncertainty. Inflation is at a 40-year high, with steadily increasing interest rates and supply chain issues. When all these factors are taken into consideration, a future recession is quite possible.
The question many commercial mortgage brokers may ask is, what should be done to weather the difficult times ahead? The answer may be the traditional business saying: improvise, adapt and overcome. Put differently, this means that it may be time to change your management strategy to fit the new economic environment. And this may require a new corporate governance plan.
Corporate governance, in its simplest form, means management of an organization. But it is much more meaningful and complex than it may first appear. In general, corporate governance is usually thought of as a system of rules, policies and practices that dictate how a board of directors manages and oversees the operations of a company.
It is nearly impossible, however, to develop a single comprehensive definition of corporate governance that is relevant in all circumstances. To truly understand the term, it must be considered from different viewpoints depending on the company size, current business environment, management style and many other variables. The single objective is to enhance a firm’s performance and serve the best interest of all stakeholders, whether that is two or 1,000 interested parties.
Facing corporate problems
The notion of corporate governance can be applied to all disciplines, and it may be used to refer to all levels of authority and leadership within a company or organization. It can be argued that the basic values of any organization depend on its commitment to strong corporate governance. Also, poor corporate governance may lead to a company failing to achieve its stated goals and even can lead to the organization’s collapse.
In real estate finance, (corporate governance) can be associated with a lower cost of capital, higher returns on equity, greater efficiency and more favorable treatment of all stakeholders.
Here’s an example: A community bank was experiencing serious problems with its commercial real estate loan portfolio. The bank had developed an unacceptable commercial loan concentration level, and it was experiencing a high level of delinquencies and potential charge-offs. Regulators were concerned, and the board of directors had exhausted its corrective actions with little or no positive impact.
Nonetheless, it is the fiduciary duty of the board of directors to find solutions and work through problems. Out of desperation, the board engaged the services of an experienced consultant that recommended a top-down reorganization of the bank, including the implementation of a new and different corporate governance plan.
After deliberation, the board did not accept the recommended corporate governance plan. Its members did not have the foresight or strength to make the necessary changes to policy, procedures, strategic plans or staff to address the problems. A few months later, the bank failed and was forced to close its doors.
All shapes and sizes
The concept of corporate governance applies to organizations of all sizes: giant publicly owned companies; small, privately-owned firms; and even one- or two-person commercial mortgage brokerages. Arguably, the smaller the organization, the greater the difficulty for developing and injecting the concept of governance into the organization.
It’s true that formal corporate governance is not commonly found in smaller organizations. Unfortunately, the investors and owners of startups or small organizations may not see the true value, or they may feel they cannot justify the time to develop a formal or semi-formal corporate governance plan.
That is not always the best decision. Research has shown that small organizations will benefit by incorporating governance practices at their inception, which is when organizational structures begin to take shape. All owners and investors of startups or small companies expect their organizations will grow, become profitable, develop market share and increase in value. Appropriate levels of management are essential to achieve the referenced objectives.
Many small mortgage companies develop policies, procedures and codes of ethics, then post this information on their website to be seen by existing and new clients, referral sources, banks and regulators. This is part of developing a solid brand around good corporate governance.
Time for change
One significant role of corporate governance is to create a system that allows for change. There are times when senior management must acknowledge that the company’s current strategy is not working, causing it to fall behind, not achieve its potential and not keep up with the rapidly changing business climate.
Either a company’s financial performance is getting better or it is getting worse. It is highly unlikely for a firm to stay in the same place for very long. Performance never just coasts along. Coasting has only one direction — down.
Today’s commercial mortgage broker faces many challenges that necessitate a change to current operational strategies. Inflation, political issues, supply chain problems, rising interest rates, unsettled equity markets and stakeholder expectations seem to demand change if one is to stay relevant in the market.
These factors all make for uncertain times. Brokerage leadership should consider stronger business plans and examine where variations — and even larger changes — are required. In other words, implement strong corporate governance.
What may be required is a new approach, new strategies and a new way of thinking about existing challenges. In short, it may be time for a change. And this frequently results in resistance by entrenched owners, pushback from managers, and a litany of excuses for why new ideas and policies will not work.
A different company
Brokerage management is under constant pressure to improve quarterly earnings. One major impediment to corporate governance is the constant expectations for continued short-term performance. If a downturn is serious enough, investors or executive management will call for change.
Given the many benefits of good corporate governance, firms should voluntarily reform and change. They must always seek new and improved methods of delivering loan products to their markets. They must increase the client satisfaction level and, for the final proof, reach greater profitability.
To achieve significant advancement, leadership may need to implement a new degree of corporate governance at all levels of the business entity, which will instill a new companywide spirit and initiative. Unfortunately, there may be collateral damage along the way. Not everyone can or will buy into the new mandates. When this occurs, those who don’t want to go along may have to be let go.
There is a simple corporate strategy test that all organizations should take before embarking on the development of a new corporate governance plan. The single-question test is this: Is today’s strategy working? It is a simple answer, either yes or no. If yes, then read no further, just do more of the same. But if the answer is no, then it is time to explore the options and develop a new corporate strategy.
Studies have shown that good corporate governance generally pays higher dividends. In real estate finance, it can be associated with a lower cost of capital, higher returns on equity, greater efficiency and more favorable treatment of all stakeholders. Commercial mortgage brokers have three important assets: their time, knowledge and self-discipline. When these are properly employed, success is assured.
Time is one of our most finite resources. Once spent, it can never be retrieved. The benefit or opportunity missed by choosing an alternative action is known as opportunity cost. Every choice one makes has trade-offs, and opportunity cost is the loss associated with a particular decision.
Choose wisely. When it comes to knowledge, you must be a lifelong student of your craft. Increase your knowledge and increase your income. The world is always changing; either we stay up to date with it or we fall behind. There is no alternative.
Then there is self-discipline, which allows one to stay focused on their established goals. It enables a person to stay in control and adjust to most situations. Self-discipline is like a muscle in our body: the more you exercise it, the stronger it becomes. Lack of self-discipline frequently results in procrastination, disorganization, indecision, confusion and — in extreme cases — the inclination to give up.
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It is reported that 20% of the people earn 80% of the revenue. Finding your place among the 20% requires strong commitment, staying abreast of current markets and the self-discipline to implement new corporate governance. It isn’t easy, but it’s doable.
In his book, “Naked Economics: Undressing the Dismal Science,” author Charles Wheelan writes that “one need only be slightly better than the competition in order to gain a large and profitable share of that market.” Good corporate governance can help a commercial mortgage company reach its full potential and find new levels of success. ●
Garry Barnes is managing director of PW Partners Consultancy, headquartered in Salt Lake City, and is a freelance writer. He is a former president and CEO of banks in Arizona, California and Utah. He has taught at the university level, and is a frequent writer and lecturer on banking, finance and real estate matters. Barnes has served on the U.S. Small Business Administration’s National Advisory Council and received the SBA Arizona Financial Services Advocate of the Year award.
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