2 Apr, 2007
Hotel Boards Under Transparency Pressure
A significant transition in corporate governance and executive pay is under way amongst the boards of public lodging companies as shareholders seek accountability and transparency like never before, according to the 2006 Hotel Industry Board Survey by the HVS Global Hospitality Services.
The consultancy last week released the results of its 8th annual survey of board practices and performance, with this year’s analysis covering the public documents of 44 public lodging companies, mainly European and US-based multinationals.
Including 12 new companies with many new Real East Investment Trusts, a few real estate companies and two cruise lines, the companies were ranked in four key categories:
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Size, makeup and independence of the board
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Committee structure and effectiveness
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Presence of interlocks, insider participation and related transactions
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Commitment to pay-for-performance in executive and director pay.
According to HVS, “interlocks” refers to the practise of “you sit on my board and I will sit on yours” and “insider participation” means “directors doing business with the company.”
These practises have been referred to as cronyism and nepotism when Asian companies and state enterprises have been scrutinised. With Western companies now facing the same heat, it is interesting to see many failing the test in quite a few areas.
This year’s study again saw Four Seasons being rated the best in market with a score of 35 out of a maximum of 40 (based on a score of 10 for each of the four categories). It was the second time Four Seasons had topped the list.
Other prominent brand-names were way down the ladder, Hilton being ranked 15, Marriott 18, Walt Disney Corporation 20 and Starwood 24.
This year’s HVS survey brought a number of changes into prominence. Said the HVS report, “The last two years have seen significant transition in the areas of corporate governance and executive pay. Shareholders are expecting accountability and transparency like never before.
“For the most part, lodging companies have been listening to shareholding and industry experts and have made their boardrooms less clubby and more about work product.”
The report identified the following results and trends this year:
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43% had an unbalanced board (an even number of members)
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63% had too many insiders on the board
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50% had three-year terms, instead of one-year terms
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23% had insufficient committee structures
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75% had allowed insider participation or had interlocks.
HVS said it had modified some of the criteria in response to evolving market conditions. For example, it deducted points for the presence of an executive committee and the linkage of chairmanship with the CEO. Nearly 30% of the survey group still had an executive committee and 42% allowed the CEO to be chairman.
HVS gave extra points for having a lead director (a designated director that can call special meetings of the outside board members). It gave an additional point to boards that required directors to purchase stock in the company. Based on that, it found that four companies in the survey group appointed lead directors and eight required directors to buy stock in the company.
The survey said the number of insiders to outsiders on the boards is an important distinction, as the US SEC is requiring a majority of outside directors on the board.
“In fact, many experts think that the CEO should be the only insider on the board. The top governance companies also had an outside chairperson, and had one-year terms. By having one-year terms, directors stand for re-election each year. Priceline and Sunstone were the only companies to get perfect scores in this category.”
The report also frowned upon the presence of an executive committee which it described as being “a simple vehicle for a headstrong CEO to control the board.” It found that 14 companies still had some form of an executive committee. “This must change,” the report stressed.
Some of the strongest words were reserved for the analysis of interlocks and insider participation.
Said the report, “The investment community continues to “call out” companies that allow interlocks and insider participation. The potential conflict of interest is so obvious that it is amazing how rampant this behavior is.
“For example, ILX rented office and warehouse space from a company controlled by the CEO’s family. The company also was involved in a land transaction with another board member and lent money to another closely connected company. Although most companies state that these types of transactions were done at “market value”, it is hard for investors to verify.”
Also facing rigorous scrutiny was Pay-For-Performance, described as being “the hottest topic in the last couple of years” and “a sore spot for investors.”
“Huge golden parachutes and in some cases pay-for-nonperformance, has the SEC and investor groups changing the way in which executives are paid. New SEC regulations are requiring entirely new reporting on executive compensation. Shareholders are now going to have more involvement in approving pay programs and packages.
“DiamondRock was the first company to ever get a perfect score in this category. We hope that many others will follow their lead,” the report said.
The full listing is worth studying: http://www.hvs.com/StaticContent/Library/2006HotelIndustryBoardSurvey/
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