Hotel Industry Boards Improving Under Shareholder Pressure

Keith Kefgen | BOARD PERFORMANCE STUDIES, CORPORATE GOVERNANCE, LEADERSHIP, PERFORMANCE MANAGEMENT

Board directors had another tough year in charting the course for publicly traded US hotel companies. Although the industry had some performance improvements, excess debt, capital constraints and political unrest continue to put a damper on quick improvements. It also appears that Congress and the SEC are focused on the financial industry and alternative investment vehicles such as hedge funds for the time being. Public hotel companies may have some breathing room but shareholder activism is still at a fever pitch.

In the 12th annual study of US hotel company board performance, Starwood Hotels & Resorts overtook previous winners Host Hotels and Morgans to win the top spot. Starwood is a past winner of our top performer award and has consistently been at the top of our list. This year we surveyed twenty-nine companies, down from thirty-one last year. View all the results here. As in past surveys we ranked companies in four 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;
  • Pay-for-Performance models for board and executive pay.

Size & Makeup
Experts agree that a well devised board has between five and eleven members, with a preference for an odd number. In addition, top performing boards should have an outside Chairman and a super majority of outside directors. These requirements make for solid checks and balances. Only four companies including Starwood meet these simple requirements. The straightforward reason for low scores in this area is too many insiders on the hotel boards. It is time for hotel companies to bring in talent from outside and stop being so insular. It was notable that twelve companies designated a Lead Director, where inside Chairmen were present; a noticeable step in the right direction.

Committee Structure
SEC requirements now demand that the following committees must exist:

  • Audit: with a designated expert
  • Compensation: with new reporting requirements
  • Governance: with existing requirements
  • Nominating: with new regulations

Audit and Compensation committees get the most attention from regulators and shareholders alike. Financial scandals and excessive pay have demanded a higher degree of expertise in these disciplines. From our analysis, it was clear that hotel boards are now more engaged in strategic planning and met twice as many times as they did in 2000. Seven companies had perfect scores in committee structure, compared with zero companies ten years ago.

Insider Participation & Related Transactions
It appears that the classic insider participation (you sit on my board and I sit on your board) is a thing of the past. With that said, sixteen of the twenty-nine companies had some form of related transaction or a board member collecting additional fees from the company. We will continue to let shareholders make a decision on the possible conflict of interest but more disclosure is necessary in our view.

Pay-for-Performance
The overall scores in executive pay have improved dramatically over the last decade and a testament to shareholder intervention. We have been one of the more vocal proponents of rational short and long-term incentive programs and the industry has listened. Eleven companies had a nine or a perfect ten in this area, with Host, LaSalle and Ashford leading the way. It is clear that executives and shareholders are having meaningful dialogue on appropriate metrics for incentives.

I predict that board performance will continue to improve in the coming years and that a new crop of board directors are looking at their responsibilities in a new way. Boards are becoming more engaged in the strategic planning and risk management process. The boards that I am involved with are also spending much more time discussing crisis management, succession planning, performance management and shareholder communication. I highly recommend reading “Owning Up” by Ram Charan if you are interested in improving the board you sit on.