A recent report shows that hotel industry boards are improving under added shareholder pressure
Many publicly-traded US hotel companies have been off the radar for some time due to investor focus on the new regulatory reforms imposed by the SEC and Congress. As shareholders have adapted to the new environment their attention has return to the hotel industry and, according to a new report, activism in the sector is at all time high.
Given the high level of activism HVS, a global consulting and services firm, studied the state of corporate goverance at 29 companies in the hotel sector. The 12th Executive Search Study of US Board Performance analysed hotel business across four criteria: size, make-up and independence of the board; committee structure (number of meetings and effectiveness); extent of insider participation and related transactions; and pay-for-performance models for board and executive pay, says Keith Kefgen, chief executive officer of HVS executive search.
The authors of the report assigned scores based on the four criteria and selected Starwood Hotels & Resorts as having the best governance in the sector, displacing last year's winners Host Hotels and Morgans.
Size and make-up
When it comes to the internal structure of hotel boards, experts believe that a 'well devised board has between five and eleven members, with a preference for an odd number,' says Kefgen. He also suggests that top-performing boards should move away from the traditional structure of hiring 'insiders' and instead have an external chairman, coupled with a large majority of outside directors. 'The straightforward reason for low scores in this area is too many insiders on the hotel board. It is time for hotel companies to bring in talent from outside and stop being so insular,' Kefgen cautions.
'These requirements make for solid checks and balances. Only four companies, including Starwood, meet these simple requirements.
Committee structure
In compliance with SEC standards, the following committees must be present at all companies: audit, with a designated expert; compensation, with new reporting requirements; governance, with existing requirements; and nominating, with new regulations.
Committee structure is an important element when shareholders and regulators analyze governance standards at public companies. '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,' says Kefgen. '[Now] seven companies had perfect scores in committee structure, compared with zero companies ten yeas ago.'
Insider participation & related transactions
In the past, most companies would adhere to the 'you sit on my board and I sit on your board,' philosophy, says Kefgen, although this is becoming less common. However, the study indicates that, 17 of 29 firms had a board member engaged in some form of 'related transaction' or a director collecting additional fees from the company. 'We will continue to let shareholders make a decision on the possible conflict of interest but more disclosure about these relationhips is necessary in our view.'
Pay for performance
Although this may be the last category, it is perhaps the hottest topic on the table. Experts suggest that the overall scores in executive compensation have improved significantly over the last decade and, according to Kefgen, this is a result of active shareholder intervention. 'Eleven companies had a nine or a perfect 10 in this area, with Host, LaSalle and Ashford leading the way.'
As a response to increased activism, executives shareholders have been engaging in dialogue with shareholders to promote and explain their compensation structure. Based on the study, Kefgen predicts 'board performance will continue to improve in the coming years, and a new crop of board directors are looking at their responsibilities in a new way.'
