Board Performance in Hospitality

New trends in the board room are emerging based on Aethos Consulting Group™’s study of corporate governance in the lodging industry. This does not mean that perfection has been achieved in previously raised key areas. Unfortunately, we continue to see a few companies with classified boards, little diversity, questionable independence, and holding back as it relates to more performance based compensation.

But newer concerns have developed in corporate governance and the lodging industry is yet to be a shiny example of best practices. Three points to note which may drive change in 2015-16 are:

• Succession Planning – although some boards appear to be vocal regarding efforts to monitor this important part of their risk oversight responsibilities, we would like to see this area explored in greater depth with more transparency for the shareholder.
• Corporate Social Responsibility – particularly as it relates to sustainability measures – a card on a bed regarding sheets and towels is not the “be all end all” of sustainability – who is paying attention here? Where does this fall within the responsibilities of the board? More and more shareholders (who also double as guests) care about the green movement – the boards need to get on board.
• Security – All security is, of course, an issue in the times we live in, but the security we are referring to relates to information technology.  Is there a web safety pro on board?  Who is keeping an eye out for cyber security?  If the litigation Wyndham has been involved in is any indication, this should become an integral part of risk oversight on behalf of the board.

Will these issues drive composition and responsibility changes in the board room in the coming years? We certainly think so, as the stakes are just too high.

Similar to our previous studies, we examined and ranked companies in five key areas of corporate governance:

• 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.

Of the 26 hotel companies and REITS studied, not one group scored perfectly as it relates to size, makeup and independence of the board due to one of the following: an even number of board members, the chairman and CEO functions are not separated, too many insiders on the board, a classified board (terms of greater than one year), and finally, the lack of a formal diversity policy. Click here for an overview of the total scores and the top-performing boards.

With respect to committee structure, the industry fared better with just under 50% of the group achieving perfect score – this means that they have the appropriate committees comprised of independent board members, meet at least four times a year and do not have an executive committee.

Related party transactions remain prevalent in our surveyed group with only nine having absolutely no related transactions (whether approved by the board or not). For some, this is a matter of course due to the nature and history of their existence – such as Ashford and Host. For others, it seems it would be a fairly easy fix – just say no!

In the evaluation and communication bucket, a few observations: all the companies include a policy to conduct annual self-evaluations in their governance documents, some even comment in their proxies that this has been done, yet no one posted the results. Could a best practice going forward be to summarize (respecting the confidentiality of the individual boards) the results of said evaluations and present to shareholders in the proxies?

With regards to communication, very few companies allow the BOD free and clear access to any of the senior management – most do want to control the communication through the CEO. And with respect to the shareholders, most of their communication is reviewed and filtered through the Corporate Secretary. However, we noted that a number of companies are posting “whistle-blower” 24/7 hotlines either on their website, or in their business conduct code. We would like to see these hotlines published clearly in the proxy and on the website as a best practice going forward – versus a number buried within documentation on a tab within in a tab on a website.

Finally as it relates to compensation, more and more companies are moving towards a great percentage of the NEO pay being performance based. Full marks were afforded to only five of the 26 surveyed companies, with the hold up primarily being the lack of a claw-back policy, continued use of gross-up provisions, no stockholder requirements, or no third-party compensation expert used to analyse peer group comps.

Although not part of our formal evaluation this year, it was noted when reviewing the 2015 Proxy Statements, less than half mention succession planning in any meaningful manner; five mention sustainable practices; and only three mention cyber security responsibilities.

Congratulations to Priceline this year, who scored 40 out of a possible 45 points, and DiamondRock, Sunstone and Ryman who were directly behind them. More effort in the articulation and monitoring of a board diversity policy was a common weak link. As a comparison, we analysed two Fortune 500 companies that recently won governance awards. PepsiCo recently received the award for Exemplary Shareholder Engagement at the New York Stock Exchange (NYSE) Governance Services’ 2015 Governance, Risk & Compliance Leadership Awards. Although Pepsi was strong in this area, our analysis determined that their board is too big, their CEO is also Chairman and they had some Related Transactions. Interestingly, Pepsi would have scored 36 in our study.

Navient won the Best Board Diversity Initiative award in the same NYSE program. While this is commendable, they unfortunately had many of the same issues as Pepsi. Navient would have also scored a 36 in our study. Strong scores but neither better than our top performers. The National Association of Corporate Directors (NACD) has some interesting research and programming for sitting and aspiring directors who wish to be best in class. We strongly recommend that hospitality directors take a leading role in the association and making governance at the forefront of their responsibilities.