|By: Keith Kefgen and Lillian Huang - January,
Imagine that you are an institutional investor with a large position in Paradise Hotels & Resorts." As you arrive back to the office from vacation, you find out that Paradise's hoard ousted the company CEO and CEO. Can you be sure that the board's actions were in the best interest of shareholders or will you be left far from paradise?
We set out to answer this type of question with our First Annual Survey of Board Performance. The purpose of the survey was to see if lodging industry boards are living up to their obligations and fiduciary responsibilities. In theory, the board should act as a check and balance between investors and management. Unfortunately, our survey found that not all hoards are created equal. After analyzing public documents of 57 lodging compa-nies, speaking to corporate governance experts, and reviewing the responses to our written survey, we rated each lodging company in four key areas:
The results of our analysis also brought to light a number of key trends. Of the companies surveyed:
Experts claim that there should be no more than two or three company employees on a board. Greater participation needs to come from impartial outside directors in order to ward off inherent conflicts of interest. In the lodging industry, Candlewood Hotel Company had the most imbalanced board, with eight insiders and just two outsiders. Canadian Pacific, on the other hand, had only two insiders and 14 outsiders. Another problem boards often face is allowing family members to promulgate a board. A third of Loews Corporation's board is composed of the Tisch family, while Sonesta's board is mainly comprised of Sonnabend family members. Not exactly the impartiality investors are seeking.
We further propose that for a board to be effective, directors need to attend the meetings. It seems obvious but companies only made general statements about overall attendance, rather than providing actual attendance in proxy statements to ensure that board members show up for meetings and make a worthwhile contribution.
Committee Structure and Effectiveness
The experts say that the "must have" committees for any board are the audit, compensation, nominating and executive committees. Only 10 of the 57 lodging companies had all four nominating and executive committees. Only 10 of the 57 lodging companies had all four committees, and each committee only met once in 1997. Meanwhile, Host Marriott had all four committees, all of which met at least five times. Another no-no is to have the CEO sitting on the compensation committee. Corporate governance experts question the effectiveness of a CEO making decisions on his own compensation. John Q. Hammons was a violator, chairing his own compensation committee. The audit committee is particularly vulnerable today. Look at Cendant's inability to properly assess the financial condition of CUC prior to the merger, putting its board in the midst of one of the largest accounting frauds in years. Furthermore, with 28 board members, Cendant had one of the largest and most uncontrollable boards in the industry.
Conflicts of Interest: Interlocks, insider Participation and Related Transactions
Allowing interlocks, insider participation, or directors to collect
professional fees is a
Commitment to Pay-For-Performance
As compensation experts, we feel that executive compensation should he linked to specific performance goals and and directors should be required to own company stock. Linking pay and performance makes managers think like owners. It's that simple. Furthermore, when board members own stock they too think like owners.
The year's top performing board was Host Marriott. Host scored high in all four categories. Despite the size of Disney's board, they also maintained high ratings in all key areas. Sunstone and AmeriHost were also strong in each area, showing no significant weaknesses. It was a pleasant surprise to see Canadian Pacific on the top list. As a Canadian company they are not required to meet SEC requirements, but to their credit, had one of the most detailed board reports.
Based on the survey criteria, John Q. Hammons Hotels, Loews Corporation and Cendant were found to have the most work ahead of them. These boards failed in three out of the four categories. For example, the board at John Q. is made up of insiders or individuals who have professional ties to the CEO; their CEOs sit on the Compensation Committee they have board members who also collect professional fees from the company and they have no pay-for-performance criterion. Any idea why they ranked at the bottom of this year's list?
We believe that corporate governance is a critical aspect to running
a public company. Investors are becoming increasingly savvy about
their investment strategy. With the popularity of on-line services
today, investors can conduct in depth research, communicate with company
managers and execute a trade almost instantaneously. Board members need
to understand that they are the glue between investors and management.
We salute the top performers and encourage the others to emulate their