Gaming pundits have suggested that the wagering industry must prepare itself for the “new normal” of diminished economic expectations and returns. Other more optimistic voices have pointed to the emergence of new technologies, jurisdictions and social gaming that will lead to new business opportunities. How will public companies deal with these and other unforeseen changes in an uncertain future?
The answer is with better governance and more board involvement in the strategic planning process. In our view, good governance policy is very straightforward. Follow our analysis to see who in gaming is getting it right.
Our conclusions are based on an analysis of SEC filings and the opinions of other corporate governance experts. We examined 33 companies and rated each in the following four corporate governance fundamentals:
• 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
For each of these categories we focus on specific attributes or activities and award 0-10 points accordingly. Our intent is to provide investors, board members and industry executives a method for evaluating performance and identifying areas that warrant improvement.
SIZE AND MAKEUP MATTERSCorporate governance experts agree that an optimal board structure consists of an odd number of seats (to eliminate the possibility of a tie vote), with the total number of seats ranging between 5 and 11 members. To keep objective and independent, boards should be composed of fewer than 25 percent insiders. In 2010, only four out of 33 gaming boards possessed both an odd number of members as well as fewer than 25 percent insiders.
Ten out of thirty-three gaming companies had an outside chairman or lead director, the sign of a truly independent board. The remaining companies were controlled by the CEO. We also consideredlength of term, where most experts regard a one- year term as most favorable. In a positive trend, twenty out of 33 companies had one year terms, an increase from 18 in last year’s survey.
STRUCTURE AND PARTICIPATIONCorporate governance experts mandate that boards maintain four key committees: audit, compensation, nominating and governance. To measure this aspect of board performance we looked for the existence of each of these committees as well as the frequency with which they met. The average frequency of audit committees remained flat between 2009 and 2010; that of compensation committees decreased slightly while the frequency for nominating and governance committees increased slightly over the same period. A troubling trend was the increasing number of insiders participating on committees. We were dumbfounded that six companies still had an executive committee, a relic of 1980’s governance.
We saw a slight increase in the number of companies with insider participation and an even larger increase in the number of related transactions. Three companies had insider participation and 21 companies had notable related transactions. We suspect that stricter SEC reporting requirements have brought to light more of these relationships. Several companies in our survey were considered to be “controlled,” so this issue will never be entirely eliminated.
PAY-FOR-PERFORMANCE COMMITMENTA “pay-for-performance” compensation model is advocated by nearly every publicly traded gaming company. Governance experts would agree that management and shareholder interests are best aligned through this commitment. We’ve seen small improvements in the past year with some companies increasing stock ownership guidelines for their named executive officers. We have also seen a few companies shift the mix of base, bonus and long-term incentives to be more highly skewed to the long-term.
The components we look for in evaluating compensation programs:
• A well articulated and thorough compensation philosophy
• Salaries that are set using a peer group analysis
• Quantifiable and detailed bonus metrics
• Long-term incentives that are performance based and are not excessive
• Benefits and perquisites at appropriate levels
With the recently passed Dodd-Frank Act, otherwise known as “Say on Pay,” shareholders of some companies were asked to approve executive compensation as recommended by the compensation committees, as well as vote on the frequency with which such votes would occur. Several companies recommended annual votes while others recommended a shareholder vote every three years. We question the significance and relevance of such “non-binding and advisory” votes if no required action is taken.
Optimal compensation for board directors is a mix of equity and cash, the latter in the form of attendance and committee fees versus retainers. Nearly all directors are receiving stock options, RSU’s or a mix of both, however, seldom do we see stock awards tied to performance metrics and longer vesting periods. Few companies have stock ownership guidelines for directors, a policy that we would like to see implemented in the coming years to better align boards with their shareholders’ interests. Overall, board compensation practices in 2010 closely mirrored those of the prior year.
BALLY TECHNOLOGIES LEADS AGAINFor a second consecutive year, 2010’s best performing board belongs to Bally Technologies. David Robbins, chairman, and Bally’s entire Board of Directors should be proud of their efforts. Bally Technologies’ board is lean and efficient, made up nearly all independent members; its subcommittees were active and involved. The company’s compensation philosophy is straightforward and well thought-out. International Gaming Technologies was in a very close second place with notable improvements in its board structure and compensation philosophy. Other strong performers included Pinnacle Entertainment and Shuffle Master.
As the gaming industry emerges from the economic turmoil and governance policy is adhered to, gaming boards can concentrate on more strategic objectives and long range planning. Boards that can get their house in order and spend more time on the more meaningful aspects of growing the business and enhancing shareholder value will be the future winners of our survey.