Corporate Governance in the Post-Enron World


As a year ridden with corporate scandal drew to a close it seemed fitting that President Bush nominated a new chairman of the US Securities and Exchange Commission. William Donaldson, whose appointment awaits approval by the US Senate, has said that, “it is time for us to pull up our socks” which is rather an understatement given the Enron and WorldCom catastrophes that we witnessed in 2002. Corporate governance reform has suddenly become the topic du jour and European public companies would be foolish to regard this as solely affecting their American cousins.

As corporate governance comes under the microscope public hotel companies would do well to ensure that their house is in order and that they comply with governance guidelines. There are still European hotel companies, for example, where the roles of Chief Executive and Chairman are combined and studies have shown that those companies that combine the two have a greater failure rate. The company board should comprise a balance of executive and non-executive directors, including independent non-executives. These directors must also realise that they have an important role to play. Non-executive directors have in the past been compared to bidets: both are expensive, both add a touch of class yet nobody really knows what they are for. Board directors are there to exercise independent judgement and to keep the CEO in check and to improve the companies’ chances of superior performance.

The Enron and WorldCom fiascos have also put the debate on excessive executive pay back in the spotlight. The role of stock options as a long-term incentive for executives is coming under scrutiny in particular. Some investors have felt hard done by in cases where companies have under performed yet a rise in share price due to favourable market conditions has rewarded senior executives. Stock options have also not traditionally affected earnings but there are now calls for companies to account for share options as an expense. Major corporations such as General Motors, General Electric and Citigroup have already announced that they will do just this. Executive remuneration should be performance-based and should correspond to the company’s long-term goals. A company’s remuneration committee should only comprise non-executive directors (no CEOs please) and should meet on a regular basis. Shareholders will most likely soon be able to have more of an input regarding remuneration decisions, which could ultimately affect their investments. One recommendation is that repricing of stock options should be subject to shareholder approval.

The manner in which companies behave came under new scrutiny in 2002 and, in 2003 and beyond, it will not be so easy for corporations to pull the wool over shareholders’ eyes. We at Aethos™ will be studying the performance of European listed hotel companies with particular interest in 2003 and will be introducing our annual awards for Top Performing CEO and Top Performing Board of Directors. You have been warned.