AETHOS Consulting Group has been evaluating corporate governance practices in gaming for over a decade, examining board makeup, independence, committee structure and commitment to pay-for-performance. Significant trends in corporate governance we witnessed this year include:
- Boards having more influence on corporate strategy;
- More influence from shareholders regarding executive and board pay;
- More transparency in board member attendance and performance;
- Increased discussion of succession planning in public documentations;
- Increased policies for stock ownership for executives and directors; and
- Boards playing a greater role in merger and acquisition discussions.
In determining the performance of each board, we studied the following five areas of corporate governance:
- Size, makeup, independence and diversity of the board;
- Committee structure, number of meetings and effectiveness;
- Presence of related party transaction;
- Board self-evaluation and communication; and
- Pay-for-performance models for board and executive pay.
In this year’s study, Multimedia Games jumped from fourth place to first, which may have something to do with the fact the company was in play and ultimately acquired by Global Cash Access. Pinnacle Entertainment came in a close second this year, while last year’s winner, MGM Resorts slid to fifth place. International Game Technology (IGT) took third displacing Ameristar, which was acquired by Pinnacle in August 2013. Carnival and Scientific Games tied for fourth place.
SIZE AND MAKEUP
Examining the separation of the chairman and chief executive officer roles, only one-third of gaming industry combined the two, down from nearly 50 percent in last year’s study. Similarly, we saw fewer insiders holding the chairman role; a sign that boards are gaining real independence. Two-thirds of the survey group had a board comprised of an odd number of directors—between five and 11—a range that experts consider to be optimal.
Another aspect of board size and make-up included the number of independent versus insider members, just under half the companies had boards comprised of 25 percent or fewer insiders. With respect to term length, half of the industry put their entire board up for annual re-election versus having staggering elections.
The evaluation of board diversity policies and presence of gender and racial diversity board members, revealed a slight improvement over last year, but most boards still do not have a formal policy around the presence of gender and racial diversity in the boardroom.
The Securities and Exchange Commission (SEC) requires public company boards to form four committees: audit, compensation, governance and nominating. In addition, best practice dictate that these committees be comprised entirely of outsiders. Eight gaming companies out of 22 we examined had a perfect score in committee structure, a larger overall percentage than last year; and another positive step.
TRANSACTIONS WITH RELATED PARTIES
Our category called “transactions with related parties” examines where conflicts of interest may arise due to a company, insider or board member conducting business with an organization that is regarded to have a material relationship with the former. If any related party transaction is present, the company received zero points for the category. Only eight out of the 22 companies had a perfect score in this area, unchanged from last year.
EVALUATION AND COMMUNICATION
The effectiveness of board and committee evaluation as well as shareholder communication was evaluated in this category. Six out of this year’s 22 companies received a perfect score compared to seven in last year’s study. In the coming years, we hope to see improvement in this area as shareholders demand more transparency in communication and accountability.
We believe that the pay-for-performance for executives and directors improved over last year due primarily to several companies instituting stock ownership requirements—a trend that was prevalent in the greater Fortune 500. In addition, more gaming companies instituted claw-back policies for bonuses to align with section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
We also evaluated the pay-for-performance models used by gaming companies, and penalized those that did not have a clear articulation of compensation philosophy and incentives, absence of excise tax gross-ups, and excessive perquisites and disclosing results of the non-binding vote on executive compensation known as “say-on-pay.” In this year’s study, six companies achieved a perfect score in this category compared with only two last year.
Overall, it appears that governance along with solid financial performance has made the industry a target for privatization and consolidation. It will be interesting to see if other gaming companies will choose to split like Penn National or sell to private investors.