By Keith
Kefgen, Juliette M. Boone and Arielle Vogelstein,
August 22, 2012
Hotel industry boards have come a long way over the last decade. Most,
if not all have addressed the following:
- Board size and make-up,
- Independence through the appointment of a lead director,
- Separating the role of CEO,
- Eliminating insider participation on board subcommittees,
- Reducing the number of related party transactions and
aligning pay for performance.
Each year, HVS Executive Search recognizes a US board that is
most effective in leading a public hotel company. Using a proprietary
corporate governance model we tabulate rankings that compare board
makeup, independence, committee structure, conflicts of interest and a
commitment to pay-for-performance. Boards have done such a good job
implementing best practices in these areas that, this year, in an
effort to raise the bar we felt it necessary to modify some of our
evaluation criteria to include: board self evaluation and
communication, tighter evaluation parameters for both board and NEO
(Named Executive Officer) compensation that takes into consideration
shareholder “say on pay” votes, implementation of claw backs and stock
ownership requirements, elimination of excise tax gross-ups and purging
of excessive perquisites. We hope that the addition of these new
criteria will support public hotel boards in their pursuit of
continuous improvement. For next year’s study, board diversity will be
added to the evaluation criteria.
We were interested to see what would emerge after the passing of the
Dodd-Frank “Say on Pay” legislation. Many companies received very high
marks (in the 90s) on their executive compensation plans from
shareholders. A few received quite low marks (in the 50s), mostly due
to the influence of watchdog organizations such as ISS. It’s been a
refreshing and encouraging year in corporate governance and with the
tentative turn of the economic tide, light is appearing at the end of
the tunnel.
In our 14th HVS Executive Search study of US board performance,
Sunstone Hotel Investors jumped from its 2010 spot where it was tied
for 8th place, all the way to the top of the list, squeaking by last
year’s winner, LaSalle Hotel Properties. We surveyed 33 companies this
year, the same number as last year, despite a slight reshuffling with
Sonesta going private and Summit’s IPO. This year we examined and
ranked five key areas of corporate governance, one more than in prior
years:
- Size, makeup and independence of the board;
- Committee structure, number of meetings and effectiveness;
- Extent of insider participation and related transactions;
- Board self-evaluation and communication
- Pay-for-Performance models for board and executive pay.
Please see here for the Top-Performing Boards of 2011 and here for details on the allocation of points.
Size & Makeup
In this year’s study, director independence continued to inch upward
with 11 companies having independent outsiders for their Chairman (vs.
10 companies last year) and 16 having appointed lead independent
directors (vs. 14 last year). There was a slight decrease in the number
of companies with overall best practice board structure from five to
four. Best practice board structure is when the board has an odd number
of directors between 5 and 11, the chairman is an independent outsider
and more that 75% of the board is made up of truly independent
directors. While SEC rules dictate that a company insider is considered
“independent” after three years of separation from the company, we
still consider that individual to have a great impact on the company.
Committee Structure
Boards of Directors are required by the SEC to form the following four
committees: Audit, Compensation, Governance and Nominating. Identical
to last year’s study, nine out of 33 companies achieved perfect scores
in committee structure. However, we noticed that, on average,
nominating and governance committees met with over 20% more frequency
than in the 2010 analysis. Audit committee meetings were up slightly
and compensation committee meetings were virtually unchanged. Insider
participation on subcommittees of the board is practically non-existent
today.
Related Parties
Although the presence of related transactions has increased this year
relative to last, this is not indicative of poorer practices, but
rather a more stringent rating system. While twelve companies
demonstrated complete absence of related transactions last year, that
number has declined to only eight on this year’s scale; the new
criteria will hopefully encourage enhanced governance practices. We
hope that the companies will identify this need for continuous
improvement and look to strengthen their policies in the coming years.
Evaluation & Communication
How effectively a board operates internally, including self-evaluation
and accessibility to shareholders can be indicative of high quality
governance practices. Over 75% of the companies received perfect scores
in either self-evaluation or shareholder communication, with twelve
companies achieving a perfect mark. Although this category is new to
the analysis this year, we believe that such internal reviews and
communication generate better overall external practices.
Pay-for-Performance
Since, over the past several years, a greater number of companies have
adopted or increased stock ownership guidelines and worked with outside
advisors to better align long-term incentives, we have implemented a
more specific rating system to raise the bar in measurement. Four
companies achieved perfect scores in pay-for-performance this year, one
less than in the previous year. However, overall achievement did not
decrease, but rather a perfect score for executive compensation
required consideration of more components, including clear articulation
of compensation philosophy and incentives, articulation of a claw back
policy, and absence of excise tax gross-ups and excessive perquisites.
While it may have been more difficult to wholly comply with all the
measures, on average scores remained about the same. We believe that
the tightened examination of executive pay will further encourage
companies to implement quality pay-for-performance practices.
With new performance measures and expectations, average total scores
dropped a slightly, yet such results provide encouragement to strive
for continuous progress. Many improvements were made this year, such as
increased director independence and implementation of claw back
practices which serve to better protect shareholders. As the standards
continue to be raised, we have high expectations for the years to come.
Sunstone’s jump to first place in this year’s analysis demonstrates the
open field for improvement. We applaud Keith Locker, Sunstone’s
Chairman, as well as its entire Board of Directors, for thoughtfully
and carefully re-crafting its governance strategies and policies to
achieve a benchmark level of excellence.
HVS Executive Search is the premier executive search and advisory firm
providing consulting services to leaders of the hotel, restaurant,
gaming and
real estate industries. Practice areas include senior-level executive
search,
mid-management recruitment, compensation consulting and performance
management.
Our offices are located in New York, London, Hong Kong, Moscow, Mumbai
and New
Delhi. HVS Executive Search is a division of HVS, a fully integrated
consulting
firm focused on the hospitality industry. Founded in 1980, HVS is the
world's
leading specialist in hospitality consulting. With 30 offices globally,
HVS
offers unparalleled worldwide market expertise.