Inside Asian Gaming

INSIDE ASIAN GAMING | February 2013 32 to 4th in 2012), Multimedia Games (from 16th to 6th) and Scientific Games (from 17th to 7th). However, a number of companies did not score as well this year as last, and their ranking slipped accordingly. Among the companies falling out of the top 10 were Pinnacle Entertainment (from 3rd to 12th), Empire Resorts (from 6th to 13th), GameTech International (from 7th to 32nd), Penn National (from 9th to 16th) and Gaming Partners International (from 10th to 19th). The overall study focused on 32 companies this year, down from 33 last year due to UK-based William Hill’s acquisition of American Wagering. GameTech was fully operational throughout 2011 and therefore was included in the analysis (the company filed for bankruptcy in July 2012). The ranking looked at the following five 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; and • Pay-for-performance models for board and executive pay. Size and Makeup Gaming boards continue to focus on improving director independence with 11 companies having appointed lead independent directors (versus nine companies last year), and two more companies that elected independent outsiders as chairmen. Only one company achieved a perfect score in size and makeup (Multimedia Games), one fewer than last year. To achieve this, a board must have an odd number of directors (between five and 11), the chairman must be an independent outsider and more that 75% of the board must be made up of truly independent directors. While SEC rules dictate that a company insider is considered “independent” after three years of separation from the company, we apply the more stringent lens of “once an insider, always an insider.” Committee Structure Boards of directors are required by the SEC to form the following four committees: audit, compensation, governance and nominating. This year, two more companies (six total) achieved a perfect score for committee structure than in the prior year. Meanwhile, the number of committee meetings remained virtually unchanged, with only a slight decrease in audit committee and nominating committee meetings. Insider participation on subcommittees of the board is down 33% over last year; only six of the 31 companies have an insider sitting on a committee. Transactions With Related Parties In prior surveys the presence of interlocks (“you sit on my board and I’ll sit on yours”) were tracked, but the practice has been virtually eliminated from gaming boardrooms. As a result, this category has been replaced by an analysis of “related transactions.” Overall, the presence of related party transactions among the group decreased to 23 compared to 25 last year. Evaluation and Communication A new category regarding board self-evaluation and shareholder communications was thoroughly vetted. Issues concerning the effectiveness of internal board operations, director evaluation and accessibility to shareholders were measured. Nine of the 31 companies received a perfect score in the overall category; a number that must improve in future years. Boards that can measure their performance, strive for continuous improvement and welcome two-way communication with shareholders will see an increase in their stock multiple and shareholder loyalty. Pay-For-Performance An encouraging trend in the area of executive and director compensation is stock ownership guidelines. As pay-for-performance systems have improved, so has the transparency of pay practices. This year, a perfect score for executive compensation required consideration of more components, including clear articulation of compensation philosophy and incentives, articulation of a claw back policy, and absence of excise tax gross-ups and excessive perquisites. Average scores stayed around the same as companies balanced out each other as a result of better practices on one end, and scores fell as a result of a lack of change for others. Four companies achieved perfect scores in pay-for-performance this year, one fewer than in the previous year. Even with improvements in areas such as increased director independence and the implementation of claw-back policies and advisory votes on executive compensation, average scores dropped slightly. This does not mean poorer practice; rather it is the result of stricter guidelines surrounding corporate governance practices. We hope that companies take these updates into account and continue to strive towards protecting the interests of FEATURES While SEC rules dictate that a company insider is considered “independent” after three years of separation from the company, we apply the more stringent lens of “once an insider, always an insider.”