How have practices changed during the worst economic downturn in memory? ... Not much, say the experts at HVS Executive Search.




How have practices changed within the boards of publicly traded gaming companies during the worst economic downturn in memory? Not much.

Our 13th annual study of best practices in public gaming company board rooms shows that corporate governance scores have remained basically unchanged since 2008, with an average score of 27 out of a possible 40. We have also identified two worrying trends: 1) a decrease in the number of independent outsiders; and 2) an increase in related transactions.

We have, however, seen positive trends in the number of insiders sitting on board committees, which decreased over the 2009-2010 survey period.

Our conclusions are based on an analysis of SEC filings and the opinions of corporate governance experts. The 2010 survey included 33 companies versus 35 in 2009. We rated each company in the following four 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, MAKEUP, INDEPENDENCE

Four committees deemed mandatory by corporate governance experts are audit, compensation, nominating and governance. To evaluate 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, nominating and governance committees decreased slightly between 2008 and 2009. However, compensation committees met more frequently in 2009. This does not come as a surprise given the unstable economic environment.

Eight companies still have an executive committee, creating the potential for serious conflicts of interests. Archon was the only company without a compensation committee in 2009, stating that it was not necessary as a “controlled company”.

Most companies combine their nominating and governance committees, an appropriate practice in our opinion.

COMMITTEE STRUCTURE

Four committees deemed mandatory by corporate governance experts are audit, compensation, nominating and governance. To evaluate 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, nominating and governance committees decreased slightly between 2008 and 2009. However, compensation committees met more frequently in 2009. This does not come as a surprise given the unstable economic environment.

Eight companies still have an executive committee, creating the potential for serious conflicts of interests. Archon was the only company without a compensation committee in 2009, stating that it was not necessary as a “controlled company”.

Most companies combine their nominating and governance committees, an appropriate practice in our opinion.

INSIDER PARTICIPATION and RELATED TRANSACTIONS

We were pleasantly surprised to see insider participation decrease from 2009. However, the number of companies with related transactions went up. Only two companies had insider participation. Fourteen companies had notable related transactions (four more than 2009). It is our opinion that companies should eliminate all these activities so that conflicts of interest are never brought into question. However, with several “controlled companies” in our survey the issue of insider participation and related transactions will never entirely be eliminated.

PAY FOR PERFORMANCE

Nearly all publicly traded gaming companies advocate an executive compensation program that promotes a “pay-for-performance” model. Governance experts agree that aligning management and shareholder interests is essential and is best achieved through this commitment. Unfortunately, while many talk about it, few deliver on their promise. The components we look for are:

• 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



The recession marked 2009 as an unusual year as gaming companies suffered unprecedented declines in revenue and EBITDA as a result. At the same time, executives never worked under more stressful conditions. Interestingly, many compensation committees elected to award discretionary short-term bonuses in 2009 despite missing bonus metrics. We question the rationale of this tactic as everyone is working harder for less these days.

The SEC is now requiring boards to hire independent consultants to assist in executive compensation planning. We applaud the SEC for finally taking a stand on this issue. Proxy disclosures have also been vastly improved when it comes to executive and board compensation.

We believe the best way to compensate a board director is with a blend of cash and equity. Cash compensation that is broken down into attendance fees, committee participation fees and committee chair fees is preferred over retainers or other guarantees. While virtually all directors are receiving stock options, we look for performance metrics and longer vesting periods as we feel these align most closely with shareholder interests. We also like to see a policy that requires a level of stock ownership.

Overall, board compensation in 2009 was aligned similarly to 2008 with the important components we outline above.

BALLY RISES to the TOP

The best-performing board in 2009 was Bally Technologies. David Robbins and the entire board of directors should be proud of their work. Bally has an excellent board structure comprised mostly of outsiders, and its committees were very active during the year. In addition, the company has a compensation philosophy that is among the best in the industry.

Other strong performers were Pinnacle Entertainment, Multimedia Games, Empire Resorts, WMS Gaming and ShuffleMaster.

As the gaming industry emerges from the economic turmoil of recent years, director performance will continue to be inspected. More than ever, we encourage boards to be pro-active and increase transparency to increase and maintain stakeholder confidence.