Seeking Clarity
Seeking Clarity
Companies that foster transparency in corporate governance continue to top HVS International's yearly ranking of the best and worst performing gaming boards of directors
By Keith Kefgen and Stephen Goebel, HVS International
The level of attention being focused on boards has never been greater than in this, our seventh annual report on board performance in public gaming companies.
The Sarbanes-Oxley act of 2002 has created new standards of qualifications for directors sitting on audit committees and public companies have been scrambling to comply. In our view, every other committee will likely be affected by similar regulations.
We have been encouraging boards for many years to evaluate directors and now third-party organizations such as CALPERS and Institutional Shareholder Services (ISS) are calling for a national rating system. The boardroom is no longer a refuge for friends and family of the CEO.
As we do every year, we analyzed the public documents of 41 publicly traded gaming companies and conferred with other experts on corporate governance to rate each company in the following four fundamental areas:
• The size, makeup, and independence of the board
• Committee structure and effectiveness
• The presence of interlocks, insider participation, and related transactions
• Fundamental commitment to pay-for-performance
This year we modified some of our criteria in response to changing market conditions and input from the Corporate Governance Roundtable. As an example, this year we deducted one point from companies that continue to have an executive committee. Executive committees are now seen as a simple way for the CEO/Chairman to hijack the board.
We would also give an additional point to any company that appoints a lead director, though no gaming company has done so. Appointing a lead director is a new trend in companies that do not have an independent chairman.
The following are some general trends we observed:
• Twenty four, or 59 percent, of the board chairmen were also CEO.
• Of the 17 chairmen who were not CEO, eleven were independent outsiders.
• More than 80 percent of the group have now drafted governance policies, committee charters, and a code of ethics.
• No company has appointed a lead director.
• Twenty companies still have three-year terms and separate classes of directors.
• Twenty-three companies have no governance committee or it did not hold a meeting.
• Twenty companies allow insider participation or had significant related transactions.
• Only two companies continue to allow board interlocks.
• Only two companies do not have a compensation committee and more companies show a commitment to pay-for-performance metrics for executive compensation.
Board size, makeup, and independence
Most experts agree that a successful board should be composed of seven to 11 members (an odd number in case of tie votes) with no more than two or three company insiders and an independent chairman. Many of our top performing boards, including this year's best performing board GTECH, lost most of their points in this category (see chart).
Harrah's Entertainment, last year's best performing board, scored highest among top performers with eight of 10 available points. Other perennial top performers such as Ameristar Casinos and Aztar Corp. would improve by separating the role of CEO and chairman and going to a one-year term for directors. We believe that more companies will abandon their tiered class systems and three-year terms because of pressure from shareholders.
Balance and independence are crucial to board effectiveness. Small boards can be appropriate for smaller companies, but in the cases of American Vantage, Monarch Casino Resorts and American Wagering, their five- and six-member boards were comprised of mostly insiders.
Larger boards can suffer from the same imbalance, however, as in the case at Carnival and MGM Mirage. Carnival's 14-member board contains six insiders, while seven of the 17-member board at MGM Mirage are company executives or insiders. There is simply no reason for management to have that great a presence on the company's board.
Furthermore many of the independent members of these prestigious boards sit on as many as six or seven other boards. We predict that with the greater commitment required for being an effective part of a board of directors, directors will sit on a smaller number of boards.
Committee structure
The four committees that corporate governance experts deem mandatory are audit, compensation, nominating and governance committees.
Every company in gaming now has an audit committee, and many have recruited new members who are qualified experts per SEC regulatory requirements. Compensation committees are almost as pervasive and only two companies in the group have not formed one. A new development has been the fact that every company in gaming now has adopted (or stated their intention to draft) written charters for these committees.
Gaming companies have also recognized the importance of staffing these essential committees with independent directors, as now only eight firms still have insiders on sub-committees. More than 60 percent of gaming companies combine the nominating and governance committees, but 22 companies still do not have a nominating committee, or the committee did not meet.
Unfortunately, 12 companies still have executive committees that we believe should be disbanded.
Interlocks, insider participation, and related transactions
The investment community has taken a very harsh view of companies that allow board interlocks (you sit on my board, and I'll sit on yours) as this situation creates biased opinions. To their credit, gaming industry boards have nearly done away with interlocks.
Only two boards continue to allow them to exist. For example, Frank Stronach is chairman of both Magna Entertainment and M.I. Development, and Brian Tobin, the CEO of M.I. Development, is also a director and vice chairman of Magna International. This relationship makes it very difficult to view Tobin's input as independent or unbiased.
Many more of gaming boards-49 percent-still allow insider participation and related party transactions. For example Archon Corporation engages Jones Vargas, a law firm at which one
of their directors is a member to provide legal counsel to the company. We strongly encourage companies to discontinue such behavior, as it only creates questions of impropriety.
Commitment to pay-for-performance
Governance experts agree that management and shareholders must be committed to the same goals. A primary method for aligning the interests of both groups is a commitment to pay-for-performance.
Recent ISS research shows that companies that have a well-conceived pay-for-performance plan almost always out-perform those who do not.
Components of a well-designed compensation program include:
• A well thought out, and artic-
ulated compensation philosophy
• Salaries that are set using peer group analysis
• Quantifiable bonus metrics
• Long-term incentives that are
performance based and are not excessive
• Benefits and perquisites at appropriate levels
GTECH top performer
This year's best performing board, as we noted earlier, was GTECH Holdings Corporation who had perfect scores in three of the four categories.
Other top performers in this year's study, Harrah's Entertainment and Argosy Gaming, have been top performers in previous years and always show commitment to quality governance. Rounding out the top five are Ameristar Casinos and International Game Technology. The consistency of the top performing boards shows that once good governance practices have been adopted, they tend to be self-maintaining.
Our list of worst performers has changed for the first time in three years primarily because Bingo.com, Florida Gaming, and MDI Entertainment no longer exist or had no public records available.
Churchill Downs, Archon Corporation, Riviera Holdings and our other lowest achieving boards are making a better effort at corporate governance than the companies who are gone from our study, but obviously still need to evaluate their boards' purpose.
Based on this year's study we feel that the trend to better corporate governance is definitely alive and observable in the gaming industry.
HVS International is a human resources consulting firm dedicated to the gaming, lodging and restaurant industries. For further information, contact Keith Kefgen, president, at kkefgen@hvsinternational.com, or Stephen Goebel, vice president, at sgoebel@hvsinternational.com.
