By: Keith Kefgen
Cybersecurity. Say-on-Pay. Short-term vs Long-Term. Shareholder Activism. All of these issues are at the forefront for board directors these days. Change in corporate governance has reached a dizzying pace. How is the gaming industry reacting and/or setting the standard of change in governance? It appears that a number of gaming companies are creating best practices, while others need to update their standards in a big way.
Casino Journal and AETHOS Consulting Group have be examining corporate governing practices for more than a decade. This year’s study includes 26 companies that have significant business concerns in the gaming industry. This study examines board makeup, independence, committee structure and pay-for-performance in determining a governance score for each company. Click here to access the published article or continue reading. For an overview of the total scores and the top-performing boards, please click here.
MGM Resorts took the top spot for the second year in a row, receiving 41 out of a possible 46 points. In particular, MGM made significant progress in board diversity and their rationale for board composition. We applaud James Murren and the entire MGM board for their diligence in corporate governance.
Pinnacle Entertainment followed in second place with 38 points, consistent with their ranking in last year’s study. Other companies rounding out the top five rankings include Carnival and Scientific Games Corporation, who tied for third place with 36 points each, and Nevada Gold & Casinos in fifth with 35 points.
The evaluation was broken down into five key areas:
- 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
SIZE AND MAKEUP In determining the effectiveness of the size and makeup of a company’s board, we looked at six attributes: the total number of board members, the length of term, the characteristics of the Chairman, the presence of a lead director, the ratio of insiders and outsiders on the board, and the board’s diversity.
Total Number of Board Members: The board should be comprised of an odd number of members between 5 and 11; a range that most experts consider to be optimal. We found that only 12 of the 26 companies in the survey met both metrics, a slight decrease from the previous year’s study.
Length of Term: All board members should be elected annually, rather than a staggered 3-year term, something that only half of the companies did.
Chairman Characteristics: The Chairman of the board should not be the CEO, nor should they be an insider of the company. More than half (15) of the companies had a complete separation of Chairman and CEO responsibilities, but only 7 of those 15 were considered outsiders.
Lead Director: The board should have both a Chairman and a lead director. Only 12 of the 26 companies had a lead director.
Ratio of Insiders and Outsiders: When evaluating the ratio of insiders and outsiders, we concluded that 15 of the 26 companies had a majority of outsiders on the board. However, only 7 companies had the super-majority of outsiders needed to earn full points in this area.
Diversity: Companies received points by having a formal policy around gender and racial diversity, policy implementation and diversity representation on the board. We believe that board diversity is socially responsible as well as good for business, though only MGM Resorts, Carnival, and Boyd Gaming received the full points for this segment.
Overall, not a single company received a perfect score in this section. Of the 16 achievable points, Empire Resorts and Carnival fared the best with 15 points each. MGM Resorts and Scientific Games Corporation followed with 12 points each, then Pinnacle Entertainment and Full House Resorts with 11. No other company received more than 10 points in this section of the study.
COMMITTEE STRUCTURE The SEC requires public company boards to have the following four committees: audit, compensation, governance and nominating. With respect to committee structure, 9 companies in the peer group achieved a perfect score – indicating that they had the appropriate committees comprised entirely of independent board members, met at least four times a year, and did not have an executive committee.
We found that insider participation on subcommittees of the board has virtually disappeared, with only 3 of the 26 companies having an insider sitting on a committee. This minimal number shows a commitment to maintaining objectivity and keeping shareholder interests at the centre of decision making. Six companies had an executive committee, which boggles the mind in this day and age of corporate governance.
TRANSACTIONS WITH RELATED PARTIES This section examines where conflicts of interest may arise due to a company insider or board member conducting business with the company in some other way. If any related party transaction is present, the company received zero points for the category. Of the 26 companies, 16 had transactions with related parties. Though this is frowned upon, it appears that most companies are at least communicating these transactions to their shareholders and determined that they were done a “market prices”.
EVALUATION AND COMMUNICATION Issues concerning the effectiveness of internal board operations, director evaluation and accessibility to shareholders were measured in the evaluation and communication section. Only two companies, MGM Resorts and TransAct, received a perfect score of five points, though six additional companies earned four points. We reiterate that boards that measure their own performance strive, and welcoming two-way communication with shareholders will see an increase in their stock multiple and shareholder loyalty.
PAY-FOR-PERFORMANCE Evaluation of pay-for-performance models includes consideration for clear articulation of compensation philosophy and incentives, stock ownership guidelines, incorporation of a claw back policy, and absence of excise tax gross-ups and excessive perquisites. In this year’s study, 3 of the 26 companies achieved full scores in pay-for-performance: Scientific Games Corporation, Las Vegas Sands, and Penn National Gaming. We are optimistic that as shareholders continue to voice their opinion on the matter of board and executive compensation, and watchdog agencies continue to apply pressure in this area, scores will tick upward.
Although insulated from a great deal of the fervour around shareholder activism, it is only a matter of time before more gaming companies get the “Icahn Treatment”. We continue to suggest that gaming companies improve their governance policies and activities to ward off activists who are only interested in short-term profits in a transaction.