Amidst brewing controversy, the former Chairman of Digital Realty (NYSE: DLR), Laurence Chapman, has publicly expressed his concerns about significant corporate governance issues within the company. These alleged lapses shed light on the questionable decision-making processes and CEO succession planning of Digital Realty’s board, casting a shadow over the organization’s transparency, accountability, and its potential impact on shareholders.
Laurence Chapman, the ex-Chairman of Digital Realty, resigned from his roles on the board citing disagreement over governance policy and practice. His concerns revolve around the company’s board governance, CEO succession planning, his replacement as Chairman, and director evaluation practices.
Chapman’s intriguing resignation raises numerous questions about the governance practices at Digital Realty, offering an insider’s perspective on the alleged shortcomings of a major corporate board and data center provider. This also comes on the back of several recent and high-profile executive departures at Digital Realty, including Bill Stein (Chief Executive Officer), Erich Sanchack (Chief Operating Officer), and Corey Dyer (Chief Revenue Officer).
Dgtl Infra delves into each issue raised by Chapman in his resignation letter, including the intricate relationships within Digital Realty’s board and controversial decisions that could potentially impact shareholders. Keep reading to gain more insight into Digital Realty’s governance issues, which involve conflicts of interest within the board, insufficient director evaluation, controversial board decisions, and resistance to board refreshment.
Departure of Laurence Chapman from Digital Realty
On June 4th, 2023, Laurence Chapman, a former Chair and long-standing member of Digital Realty’s Board of Directors, tendered his resignation from both his board seat and his position on the company’s Nominating and Corporate Governance Committee. His resignation, effective immediately, occurred prior to the company’s annual meeting of stockholders on June 8th, where he was not up for re-election.
Chapman, who had served on Digital Realty’s Board of Directors since 2004, attributed his decision to depart to “his disagreement with the company regarding governance policy and practice”. He identified four specific issues related to Digital Realty’s governance policies and practices: i) board governance, ii) his replacement as Board Chair / Chairman, iii) CEO succession planning, and iv) director evaluation practices.
Digital Realty filed the unedited resignation letters provided by Chapman. In the letters, Chapman cites several incidents of what he perceives as poor governance practices and demanded full disclosure of his concerns.
In the following sections, Dgtl Infra summarizes Chapman’s concerns about Digital Realty and provides additional context to the situation. To enhance understanding of the situation, we have also detailed the key executives and board members – both past and present – involved in this controversy in the table below.
|Former Board Chair
|Resigned; 19 years on board
|Mary Hogan Preusse
|Active; 6 years on board
|Active; 7 years on board
|Chief Executive Officer
|Active; <1 year on board
|Chief Investment Officer
|Not on board
|Departed; 7 years on board
|Active; 3 years on board
|VeraLinn “Dash” Jamieson
|Active; 3 years on board
|Departing; 18 years on board
1. Board Governance
In his resignation letter, Laurence Chapman identifies multiple areas of concern related to Digital Realty’s board governance, alleging they have negatively impacted the company. These include conflicts of interest, inadequate evaluation of directors, challenged board decisions, and resistance to board refreshment.
Conflicts of Interest
Chapman asserts that numerous relationships within Digital Realty’s board have impacted the real or perceived objectivity and independence of board members. He refers to the close personal and professional relationships among board members, as well as between board members and company executives. Chapman provides the following examples:
- Mary Hogan Preusse (Board Chair) and Mark Patterson (Director) are close personal friends and Preusse used to work for Patterson. Both have previously held positions in the investment banking division of Merrill Lynch
- Andy Power (Chief Executive Officer) also used to work for Mark Patterson and now serves as a Director at Americold Realty Trust (NYSE: COLD), where Patterson is Chairman of the Board. Both have previously held positions in the real estate investment banking division of Merrill Lynch
- Greg Wright (Chief Investment Officer) previously worked for Mark Patterson, they are personal friends, and Wright now serves as a Director at Paramount Group (NYSE: PGRE), where Patterson is also a Director. Both have previously held positions in the real estate investment banking division of Merrill Lynch
Furthermore, Chapman points out that both Mary Hogan Preusse and Mark Patterson are “full time professional directors whose primary source of income is from director’s fees”. Each of them serve on a total of four REIT boards and they “are both very likely to be contacted as a reference for the other when you seek positions on other REIT boards”. Here are the specific boards on which each person sits:
- Mary Hogan Preusse: Digital Realty Trust (NYSE: DLR), Kimco Realty Corporation (NYSE: KIM), Realty Income Corp (NYSE: O), and Host Hotels & Resorts (NASDAQ: HST)
- Mark Patterson: Digital Realty Trust (NYSE: DLR), Americold Realty Trust (NYSE: COLD), Paramount Group (NYSE: PGRE), and UDR Inc (NYSE: UDR)
Inadequate Evaluation of Directors
Chapman draws attention to Digital Realty’s lack of effective individual director evaluations by the Nominating and Governance Committee, despite its charter and proxy statements indicating otherwise. Specifically, Chapman states, “Given that half of the independent directors sit on the Nominating and Governance Committee, performing a self-evaluation of individual directors is not very practical and has never occurred”.
Chapman continues, asserting that “As a member of the committee, I have expressed to you [Mary Hogan Preusse] my concern that we were telling shareholders that we periodically performed such an evaluation and considered its results when nominating directors. You [Mary Hogan Preusse] dismissed my concerns, telling me”:
“That is what we tell shareholders, what we do is a different matter.”
Challenged Board Decisions
Chapman implies that the actions of Mark Patterson, a Digital Realty board member, have undermined board decisions. He alleges that Patterson disparaged and lobbied against new board members, Alexis Bjorlin and VeraLinn “Dash” Jamieson who “had added new skills and additional diversity to the board”. Chapman writes:
Alexis and Dash had only been on the board for a couple of meetings when I received a call from Mark saying I needed to get “those two women” off the board. I was later told that Mark had contacted other directors to disparage Alexis and Dash and insist they needed to be off the board.
Resistance to Board Refreshment
According to Chapman, attempts to refresh the Digital Realty board have been met with resistance, particularly regarding the re-nomination of Mark Patterson. He describes a specific incident where he, Patterson, and the then-CEO, Bill Stein, were asked to withdraw from a board meeting, chaired by Mary Hogan Preusse, to allow for discussion on board nominations. Chapman writes, “The subsequent discussion took almost 5 hours while Mark, Bill and I waited next door”. Despite a long debate, Digital Realty’s board failed to take decisive action. Chapman continued:
The directors that remained in the room were divided. They reached a compromise solution, but Mark rejected that and so the board did nothing. Two directors that I consider assets to the board told me they were considering resigning. I encouraged them both to stay for the sake of the company. Despite the fact that some directors believe Mark should not be on the board, they have observed to me that they see no process that can lead to that result.
2. Replacement Process of the Board Chair
Laurence Chapman contends that the process used to replace him as Digital Realty’s Board Chair in May 2022 did not follow typical governance procedures. The decision was made informally at a hotel bar and not during a formal board meeting. Moreover, he states that “the topic was not even on the board agenda”. Directors Mary Hogan Preusse and Mark Patterson were instrumental in this decision-making process. Chapman writes:
After quote “the third glass of wine”, that group decided that this board meeting was the time for a change of chair, and you [Mary Hogan Preusse] were the choice. With the exception of Bill Stein who was excluded from any discussion, directors not at the bar were taken aside the next day or contacted by phone and told what was going to take place and that the vote would be at the very end of the board meeting.
Despite having the right to choose a new Board Chair, Chapman suggests that the process did a disservice to Mary Hogan Preusse and indicated poor governance practices.
3. Lack of Transparency in CEO Succession
Laurence Chapman raised concerns about Digital Realty’s CEO succession process, in which Bill Stein was replaced by Andy Power. He was only informed about this development a few days before a board meeting in November 2022. According to Chapman, the decision, timing, and final candidate choice had already been agreed upon by a subset of directors without engaging the entire board in the discussion. Chapman writes:
It was clear when you [Mary Hogan Preusse] introduced the topic at the first night dinner that discussions had already taken place and the decision, timing and final candidate choice had been established by a subset of directors. At dinner, a director asking a valid question was dismissed with a peremptory “don’t worry about it”.
Despite voting in favor of the new CEO, Andy Power, Chapman raises concerns about Digital Realty’s lack of transparency and consensus-building, traits he considers essential to good governance.
4. Director Evaluation Practices
In February 2023, Laurence Chapman was informed by Mary Hogan Preusse that he would not be nominated for Digital Realty’s proxy, implying he would not be reconsidered for the company’s board of directors.
Despite his desire to stay on Digital Realty’s board and his sharing of an independent advisor’s assessment with the full board, he was instructed to step down immediately, while Dennis Singleton, who had an equal tenure of service, would be allowed to step down at a later point. Chapman criticized the lack of a robust director evaluation process, despite the availability of objective assessments.
Chapman’s Plea for Better Governance at Digital Realty
Laurence Chapman argues that these governance practices endorsed by Mary Hogan Preusse are harmful to the shareholders. He suggests that investors often perceive a correlation between good governance and company performance. By publicly highlighting these issues, Chapman hopes that Preusse and the Digital Realty board will take necessary corrective actions for the benefit of shareholders and future directors.
Ultimately, Chapman’s letter leaves us with more questions than answers, including:
- How transparent and accountable is Digital Realty’s board in its decision-making process?
- How might these alleged poor governance practices impact shareholders?
- What will be the response of Digital Realty and Mary Hogan Preusse to these allegations?