Top Hotel Board Performers in a Turbulent Time
As the SEC continues to emphasize the value of corporate governance, company boards have come under greater scrutiny in recent years. Based on our evaluation methodology, Morgans Hotel Group was the top performing board in 2007
Our tenth annual study of board practices and performance resulted in Morgans Hotel Group topping the list this year. Only a year after going public, it is all the more impressive that Morgans tops our list.
Since the enactment of Sarbanes-Oxley, the industry has seen significant changes in the area of corporate governance and executive compensation. As the SEC continues to emphasize the importance of corporate governance, the roles of CEO and Chairman are becoming increasingly separate, with a heavier weighting of outside directors. In order to ensure that the board of directors acts in the investors' best interests, the role and makeup of the board have come under greater scrutiny. Similarly, more thorough examination is placed on executive and board pay as shareholders continue to demand a greater say and petition corporate boards to dole out fair compensation packages. Furthermore, financial reporting transparency is increasingly becoming a focus of the SEC.
This year, thirty-three companies participated in our survey (down from 41 last year) and they were ranked in four key categories:
- Size, makeup and independence of the board
- Committee structure and effectiveness
- Presence of interlocks, insider participation and related transactions
- Commitment to pay-for-performance for executive and director pay.
This year, 45% of the companies had a CEO who was also Chairman, which is up from last year's 40% and a move in the wrong direction. Of the 18 companies who separated the CEO from the Chairman, only 9 companies had an outside Chairman. We predict that this percentage will increase in future surveys, as the SEC and shareholders alike continue to pressure for an outside chair.
Other notable trends include:
- 48% had an even number of members on the board, slightly up from last year's 45%
- 36% had three-year terms, a marginal increase from last year's 34%
- No company had interlocks, down from 14% in the previous year
Board Size, Makeup and Independence
Board governance experts state that the optimal number of board members is between 5 and 11, depending on the complexity and size of the company. In addition, an odd number of members is preferred so that decisions cannot end in a tie.
Another important division is the number of insiders versus outsiders on the board. The SEC defines an outsider as someone who has never worked at the company, is not related to any key employees, and has never worked for a major supplier, customer or service provider (lawyers, accountants, consultants, etc.) This structure increases board independence, as outsiders bring an objective opinion where insiders might be conflicted by self-interest. Additionally, a board made up of more outsiders is more likely to provide a higher level of corporate governance to shareholders, particularly after the passage of Sarbanes-Oxley. Now the board is not only expected to practice corporate responsibility, but also remains liable for any oversight in financial reporting. This regulation holds the board accountable for approving and verifying the integrity of their financial reports on a quarterly basis.
In addition to having an outside Chairman, the top governance companies also had one-year terms instead of three. This allows directors to stand for reelection each year, which gives the board a stronger grip on maintaining effective members and turning over those who underperform.
Although we had five companies earn perfect scores in size, makeup and independence last year, this year only Morgans and Great Wolf Resorts came in with a perfect 10 in those categories.
Committee Structure
According to industry experts, there are four committees that make up an effective board:
- Audit
- Compensation
- Governance
- Nominating
Similar to the past two years, every lodging company had an audit committee but three did not meet on a quarterly basis. The SEC notes that in order to fulfill their expected duties, an audit committee should meet on a quarterly basis to continually track progress and measure performance.
Every company also had a compensation committee, and 70% met quarterly, a slight improvement from 67% last year. As the SEC and shareholders alike expect greater transparency of executive and director compensation, the committee is encouraged to meet as often as necessary to keep a close watch on company payment plans.
The nominating and governance committees (which have merged into one entity for most companies) did not meet as often. On average, these companies met 2.69 times a year, which is slightly more often than last year's average of 2.45. In November of 2003, the SEC posed stricter requirements for disclosing the specifics of a company's director nomination process on proxy statements. Instead of merely stating the presence of the committee (or lack thereof), companies are now expected to include the committee charter, disclose member independence, specify the minimum qualifications to recommend a nominee and describe the processes of identification and evaluation. They also require that this committee meet more than once a year, or every time there is a material change to the nominating procedure, which they must subsequently disclose on the Form 10-Q.
The seven companies that had perfect scores in the area of committee structure were Starwood, Host Hotels & Resorts, Royal Caribbean, St Joes Co, DiamondRock Hospitality, Priceline.com, and Red Lion.
Interlocks and Insider Participation
Although much less common than they once were, it is important to measure the degree of interlocks and insider participation when assessing corporate governance. Interlocks occur when a board member sits on more than one board, and employs questionable practices from one company to another (i.e. backdating employee stock options).
Insider participation describes when directors engage in business directly with the company. As previously mentioned, the SEC has become increasingly aware of these practices and taken measures to discourage such behavior. The four companies that reported insider participation this year also reported it in last year's survey (seven companies reported insider trading in total for 2006, but three of them didn't participate this year). No companies reported having interlocks, and we predict that this section will be removed from future surveys.
Pay-For-Performance
An assessment of board performance would be incomplete without looking at board and executive compensation. This topic has sparked much interest in the industry as the SEC has implemented stricter reporting rules that ensure companies disclose all information about how much they pay their key executives. This level of disclosure will help ensure that the board makes decisions about executive compensation from an objective standpoint, as they must have reasonable justification for both salary and incentive packages. Additionally, the increasing transparency of information gives shareholders the ability to make informed decisions when it comes to their investments. The only two companies that had perfect scores in both board and executive compensation were Choice and Host Hotels & Resorts.
In times of economic strife and uncertainty, having a strong board with sound corporate governance is crucial. Although the depth and length of this economic cycle remains unclear, we say with confidence that the first step to survival is a board of directors that is highly independent, appropriately sized, effectively structured, and committed to a model of pay-for-performance.
As this year's winner, Morgans Hotel Group has certainly proved itself among its public counterparts. The boutique firm began the year with an abrupt resignation from CEO Edward Scheetz following a public scandal that left the company in the hands of board member Fred Kleisner. Morgans did not award Scheetz a golden parachute cash payment, but instead allowed him to retain his long-term equity awards. Kleisner took control of the company seamlessly and operations were virtually unaffected by the change. The company has instituted even more stringent controls and transparent reporting since Kleisner was named the permanent CEO (December 2007). Morgans handled this situation with both dignity and competence, and in addition earned the highest score in our survey. While they did not receive the maximum points in every category, they were either near or at the top in each and thus earned the title Board of the Year.
Keith Kefgen is President of HVS Executive Search, the leading executive search firm specializing in the lodging, gaming, and restaurant industries. Keith is a frequent lecturer on industry-related issues and has written more than 90 articles on the topics of executive selection, pay-for-performance, corporate governance, and executive leadership. He is the founder of two e-commerce initiatives, hospitalitycareernet.com, a web-based recruiting site and 2020skills.com, an online assessment profile. He served on the board of the Association of Executive Search Consultants (AESC) and was co-president of the International Association of Corporate and Professional Recruitment’s NYC Chapter.
Becca Ickowicz joined HVS Executive Search after obtaining a Bachelors of Science degree from the School of Hotel Administration at Cornell University. Becca has had prior internships in New York with Morgans Hotel Group and Willow Hotels, where she got first-hand experience in hotel operations, corporate research and marketing.
Keith Kefgen
+1 516 248-8828 ext. 220
HVS
