Under Fire From Investors, CommonWealth to Change Its Ways

The real estate investment trust CommonWealth has finally decided to listen to its shareholders.

CommonWealth, run by the embattled father and son team of Barry and Adam Portnoy, is under fire from activist investors who have said the company excessively rewards the Portnoys at the expense of shareholders.

The critics are upset with how CommonWealth is structured and the way the Portnoys’ compensation is calculated. Leading the fight is a former protégé of Carl C. Icahn, the billionaire investor who has recently gone after Dell and Apple, and a major real estate developer.

On Monday, CommonWealth sought to put an end to the battle, which has now gone on for seven months, announcing a more shareholder-friendly governance structure, and tying the Portnoys’ compensation to the performance of the company’s stock.

“Over the last several months, we’ve engaged in very extensive dialogue with our shareholders, principally our long-term shareholders but also those who have been in the stock for just months,” Adam Portnoy, president of the company, said in an interview. “We think the things we’re committing to really address the majority of all of the issues that we’ve heard from our shareholders. It’s the culmination of an effort that has been coming on all summer.”

The drama began in February, when Corvex Management, an activist hedge fund run by Mr. Icahn’s former lieutenant, Keith Meister, teamed up with the developer Related Companies, to acquire a 9.8 percent stake in CommonWealth.

Mr. Meister and Jeff T. Blau, chief executive of Related, made their case for change with a 61-page presentation that accused CommonWealth of poor leadership, maintaining a clubby board, and underperformance relative to other REITs. Corvex and Related soon upped the ante, offering to buy CommonWealth for $27 a share. The stock closed at $22.54 on Friday.

For months, the Portnoys fought back, winning a series of legal victories that suggested they might be able to uphold the status quo. And efforts by Corvex and Related to get other shareholders on board was stuck in legal limbo.

But on Monday, the Portnoys essentially ceded to most of the demands made by Corvex and Related.

Instead of being compensated based on the size of CommonWealth’s assets, which Corvex and Related said encouraged the Portnoys to issue more stock and continue acquiring assets, the fees paid to management will be tied to the company’s market capitalization, and will be paid in cash and shares, instead of just cash.

On the corporate governance front, CommonWealth will add more independent directors, do away with staggered board terms and eliminate its poison pill provision.

Mr. Portnoy said that in using the updated compensation model, management would have received $8 million less in fees in 2012. But he said that if CommonWealth stock responds well to the changes, he and his father may yet come out ahead. “Our hope is that our fees may actually go up,” Mr. Portnoy said. “We’re hopefully going to get it all back.”

It remained to be seen if the changes would quiet the Portnoys’ critics. Corvex and Related could not immediately be reached for comment.

“I’m not sure I’ll ever satisfy everybody,” Mr. Portnoy said. “But I think that we have addressed the vast majority, if not all, of the major concerns that shareholders have expressed about the company.”

At the same time, Mr. Portnoy lashed out at Corvex, calling Mr. Meister’s campaign emblematic of activist investors’ focus on relatively short-term performance.

“They talk a good game about corporate governance, but I don’t think they really care about it,” he said, while insisting that Corvex’s campaign was not responsible for the changes to CommonWealth. “We’re doing what we think is the right thing for our long-term shareholders. It just happens to be most of the things they recommended.”