First Annual HVS Study Questions: 
Do Corporate Boards 
Deserve Their Pay?
Top Performers
Worst Performers
By: Keith Kefgen and Lillian Huang  - January, 1999 
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 size, makeup, and independence of the board
  • Committee structure and effectiveness
  • The prevalence of inter-locks, insider participation, and related transactions
  • Commitment to pay-for-performance
Using the above criteria, we rated each company and identified the top five and bottom five performers in the industry. The goal was to recognize leaders in the practice of corporate governance and at the same time, identify companies that need to rethink their attitudes toward the subject.

The results of our analysis also brought to light a number of key trends. Of the companies surveyed:

  • The majority of the companies claimed at least a 75% attendance record at all meetings (we doubled the validity of some of those figures and encourage companies  to publish attendance records)
  • 37% have independent consultants, attorneys, or other professionals on the boards who also collect fees for their professional services
  • Approximately 25% allow interlocks
  • 73% do not require directors to hold company stock
  • More than 70% of the Chairmen also hold the title of CEO
  • 94% do not use evaluations to monitor the performance of board members
  • 79% pay a portion of director compensation in stock (none with performance criteria attached)
  • 87% agreed that paying a portion of director compensation in stock promotes greater attention to company interest by board members
  • Less than 50% articulate a pay- for-performance methodology in paying the CEO or other executives
  • Less than 10% have a corporate governance committee
Board Size, Makeup and, Independence

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
classic case of conflict of interest. When companies allow interlocks (you sit on my board, I'll sit on yours) biased opinions occur. Likewise, when independent directors are paid for professional services rendered to the company, how independent can they really be? For instance, John Q. Hammons Hotels paid one of their independent directors legal fees of $207,050 for services provided to the company.

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.

Top Performers

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.

Worst Performance

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 governance strategies.

Top Performers
Company Name Size/ Make Up Committees Interlocks Compensation Total
Host Marriott Corp. 8.5 10 10 10 38.5
The Walt Disney Co. 6.8 9.8 9.5 9.5 35.6
Sunstone Hotel Investors 8 9 8 10 35
Canadian Pacific 7.5 9 9 8 33.5
AmeriHost Properties 8 8 9 8.5 33.5
Worst Performers
Company Name
Size / Make Up
John Q. Hammons Hotels 3.2 2.3 2.5 2.1 10.1
Loews Corporation 3.8 3.5 2.5 2.3 12.1
Cendant 4 2.5 5 2 13.5
Sholodge 3.5 5 5 2 15.5
Sonesta Hotels Corp. 3.5 4 5 3 15.5
Keith Kefgen and Lillian Huang are President and Associate Director, respectively, of HVS Executive Search, the Mineola, NY - based human resources consulting firm which produces the Hospitality Compensation Exchange Annual Report.
 # # #
HVS Executive Search
372 Willis Avenue
Mineola, NY 11501
Phone: 516-248-8828 Fax: 516-742-1905
or Email Mr. Kefgen at
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