An Expert Take on an Essential Corporate Factor

Peruse the universe of public companies and it's easier to find companies that are examples of shoddy corporate governance policies than good ones. In fact, sometimes it seems as if there are no companies with very good corporate governance at all.

I spoke to Paul Hodgson, an independent corporate governance analyst who's been tracking companies' policies for years, about this problem. Are there really any companies with good corporate governance?

Corporate governance leaders
It's pretty difficult to imagine any company with perfect corporate governance. The denizens of corporate America (not to mention traders and short-term investors) have long been focused on quarterly earnings and near-term appearances far more than best practices in shareholder friendliness.

However, Hodgson gave three interesting examples to share of corporations with solid corporate governance policies.

AutoZone (NYSE: AZO  ) : Hodgson lauded AutoZone's straightforward compensation policy, which has tended to be in line with its actual performance. Although AutoZone hasn't separated the CEO and chairman roles, it does have an independent lead director.

Hodgson pointed out that AutoZone has a good mix of experienced and new directors on the board. The director with the longest tenure (26 years) is actually the company's former chairman and founder, J.R. Hyde. The majority of directors are independent, and they're elected annually.

Shareholders seem to approve, too. AutoZone managed an impressive 98% approval in its say-on-pay vote.

JDS Uniphase (NASDAQ: JDSU  ) : Again, Hodgson pointed to a company with a simple compensation structure. Executive compensation is modest, and the company uses restricted stock in its incentive process.

Again, the majority of the company's directors are independent, and it's a relatively youthful board; only one member has double-digit tenure. In a really exciting departure from the status quo, Hodgson pointed to the company's split chairman and CEO roles, and the fact that JDS Uniphase has an independent chairman. Although this practice is increasing, Hodgson said it's still one of the rarest of corporate governance situations in corporate America.

A lack of shareholder activism in the form of shareholder resolutions over 10 years' time also points to these great practices, too.

Southwest Airlines (NYSE: LUV  ) : Hodgson described Southwest Airlines' compensation policy as unsophisticated, which is of course a good thing. In comparison to its industry, Southwest Airlines isn't handing out vast amounts of annual and cash compensation, giving shareholders nothing to complain about there.

The airline company has a rather large board, with 10 directors; its CEO and chairman roles are combined, but it can boast a lead director.

Although Hodgson admitted that Southwest's share performance hasn't been spectacular, this airline company's focus on customers separates it from its industry peers and surely shields it from many of the risks that beset its industry.

...and the laggards
I asked Hodgson for some examples of companies with bad corporate governance policies, too. There is, of course, quite a large pool to choose from.

Hodgson put entertainment companies into the penalty box, as the industry often has particularly astronomic pay for executives and also tends to have controlling managements that make public shareholders' votes futile.

Viacom (NASDAQ: VIA  ) : Here's a particularly good (or galling) example. Viacom has a dual-class stock structure, consisting of management-centric Class A shares that give shareholders far more votes than public holders' Class B shares. Founder and Executive Chairman Sumner Redstone controls about 80% of the voting power at Viacom.

Compensation issues have stirred up a great deal of controversy at Viacom. Sumner was entitled to total compensation valued at $21 million last year, and CEO Philippe Dauman's total compensation was an eye-popping $43 million.

(In fact, in August, a Class B shareholder sued Viacom and its directors, alleging that the company overpayed Redstone, Dauman, and Senior Executive Vice President Thomas Dooley .)

In addition, with such massive pay packages, if top executives are let go, you're looking at some huge golden parachute severance agreements.

Another element here is that not many shareholder proposals are filed; given Redstone's ownership stake, it's pretty pointless to agitate.

Freeport-McMoRan Copper & Gold (NYSE: FCX  ) : Mining companies may do dirty business, but here's one that's really got the corner on that market right now.

Hodgson pointed out how this huge mining company has raised eyebrows (and major red flags) with its recent decision to acquire McMoRan Exploration as well as its partner Plains Exploration & Production, in effect getting back into the natural gas segment it left behind years ago. Some major shareholders are crying foul, claiming they should get a say in a decision like this that changes the miner's business model.

If you're wondering why buying an ailing company (McMoRan Exploration, which is in dire financial straits) is especially suspect in this case, picture some board interlocking that suggests conflict of interest. Freeport-McMoRan Copper & Gold also happens to be one of the highest paid boards in the U.S. Nine of the 12 directors on its board have other relationships with the company, such as consulting, or have had terribly long tenures.

In fact, six directors have overlapping roles at Freeport and McMoRan Exploration. They'll receive a total of more than $130 million for their shares in connection with the deal. Shareholders weren't given a vote on this transaction, which some fear is an overpriced deal.

Shareholders already had a low opinion of Freeport-McMoRan's executive pay policies before this recent governance red flag. In 2011, 54% of shareholders voted against the company's pay practices. Last year, just 33% voted against pay, but Hodgson pointed out that changes the company made were likely cosmetic. It appears times are getting worse at Freeport-McMoRan -- for shareholders.

Peace of mind
Remember that companies with poor corporate governance policies often have managements and boards who are looking out for their own best interests more than shareholders'. Those are companies to avoid.

Conversely, companies with good corporate governance policies give investors not only easy-to-understand and shareholder-friendly policies, but also the positive outcome of less risk in their portfolios. That gives investors a way to sleep better at night.

What do you think of these companies' policies, or do you have your own companies you believe have best practices in corporate governance policies? Add your thoughts to the comments box below.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 17, 2013, at 11:45 AM, RRobertsmith wrote:

    no mention that JDSU has a negative 52 P/E (shallow analysis at best....)

  • Report this Comment On January 17, 2013, at 12:07 PM, TMFLomax wrote:

    Thanks for adding that thought, RRobertsmith. This piece discusses good or poor corporate governance policies, so you're correct that other analysis always does have to be done before investing. In this case, we're looking at some model examples of what to look for when assessing good (or poor) corporate governance, and I found Mr. Hodgson's examples very interesting. You're correct that other financial factors obviously need to be taken into account before springing for a stock, but what kind of corporate governance to look for (or avoid) should be a major part of the assessment, too. Good shareholder friendly policies are part of that overall picture.

    Best,

    Alyce

  • Report this Comment On January 20, 2013, at 5:19 PM, corpgov wrote:

    Good to see you using Paul Hodgson as a resource. He is very knowledgeable.

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