Problematic Governance: The 5 Worst Corporate Boards of 2015: ISS

NEW YORK (The Deal) -- With the 2015 proxy season drawing to a close and a number of companies dealing with new faces in the boardroom because of activist campaigns, The Deal is already looking forward to 2016 to see which companies might be more vulnerable to shareholder pressure because of problematic governance.

The assessment was based on Institutional Shareholder Services' QuickScore reports, which The Deal obtained, as well as company performance and newsroom intelligence.

Titan International (TWI)
ISS QuickScore: 10

Titan International this month received a third consecutive bruising annual vote of no confidence from shareholders, a large segment of whom opposed the tire maker's executive pay packages and a director's re-election. About 30% of the voting shares were against the pay packages this year, an improvement from 2014's 52% opposed and 47% against in 2013 but still substantially negative.

Frustrated shareholders also overwhelmingly backed a California State Teachers' Retirement System proposal to de-classify Titan International's board even though the company had urged investors against doing so.

A Titan International spokesman said that, given the shareholder vote, the company does indeed plan to declassify the board.

Although that might help Titan International improve its governance profile with ISS, there are additional problems, according to the QuickScore report.

Titan, like Bed Bath & Beyond was also subject to an ISS "pay for performance misalignment" qualitative review.

In addition, the company recently disclosed a "material weakness" in its internal controls, a "key risk" according to ISS.

The company put Carl Icahn protégé Mark Rachesky of MHR Fund Management on its board last year after he started up an activist campaign, but that move hasn't helped its underperformance profile.

Its return on invested capital is -7.68%, compared with peers' 10.75%, while its total return over the past two years is -46.83, compared with peers' 11.97, according to data from Bloomberg.

The company's stock price also provides little reassurance to management and board members as it is down about one-third over the past year.

The company spokesman acknowledged that the company's Chairman and Chief Executive Maurice Taylor had suggested breaking up the company by selling or splitting off its mining tire business sometime in late 2013 or early last year. If that were to happen, investors would be likely to cheer it on.

Lately, though, Titan International appears more focused on making a small acquisition in Brazil. An activist however may have a different plan for Titan International's $191 million in cash on hand as of March 31.

The spokesman noted that in addition to Rachesky, the board has been refreshed with the addition of two other new directors over the past 18 months including Gary Gowger, a board member who had a long career at General Motors. - Ronald Orol

Bed Bath & Beyond (BBBY)
ISS QuickScore: 10

With private-equity firm Leonard Green & Partners recently disclosing a small stake in Bed Bath & Beyond, the stage may be set for a leveraqed buyout or an activist campaign if the household goods retailer resists. And an activist could find a lot of hay to be made by taking aim at the retailer's governance, board and pay package for its top executive, Steven H. Temares, all of which earned the company a 10 on ISS QuickScore's rankings.

The QuickScore report notes that Bed Bath & Beyond last year earned "qualitative review" because of a perceived "performance misalignment."

Those reviews are unusual and mostly used in extreme cases. Plus, nearly 30% of shares voted against the company's executive pay package last year at the annual meeting, not a great endorsement for how institutional shareholders feel about executive performance.

Look for a substantial group of shareholders to express displeasure at Bed Bath & Beyond's July 2 annual meeting. ISS will decide early next week whether to recommend against the retailer's pay plans.

Continued poor stock performance, a substantial negative shareholder vote and potential buyout shop interest could be enough to bring an activist into the fold. Bed Bath & Beyond didn't return calls seeking comment. - Ronald Orol and Richard Collings

Cornerstone OnDemand (CSOD)
ISS QuickScore: 10

Cornerstone OnDemand received a rebuke from shareholders at its early June annual meeting, when investors with more than 60% of shares -- excluding abstentions and ballots not cast -- voted against the company's executive compensation proposals. All three of Cornerstone OnDemand's nominees received shareholder approval, however.

The employee-management software developer scores a 10 for governance risk from ISS. The proxy advisory firm has critiqued Cornerstone OnDemand's classified board, which inhibits proxy challenges.

Moreover, the pay of Founder, Chairman and Chief Executive Adam Miller came to 4.33 of the median of the peer group in the last fiscal year, according to the ISS QuickScore report.

That the company hasn't separated the positions of chairman and chief executive also drew complaints from ISS.

Cornerstone OnDemand earned positive marks from ISS because 85.7% of its directors are independent. Outside director compensation comes to 1.82 times the peer median, and the company evaluates director performance.

Cornerstone OnDemand is one of the fastest-growing public companies deploying a software-as-a-service model, according to UBS, which has forecast 28% growth.

Companies such as IBM (IBM), Oracle (ORCL) and SAP (SAPGF) have rolled up talent-management software rivals, however, and UBS has said that increased competition from the larger players is a risk.

Cornerstone OnDemand didn't respond to requests for comment. - Chris Nolter

Cablevision Systems (CVC)
ISS QuickScore: 10

Controlled by the family of James and Charles Dolan through a two-tiered stock structure, Cablevision Systems was cited for its dual-class stock, lack of a majority vote standard for electing directors to its 18-member board, lengthy tenure of directors and lack of an independent chairman, among other factors.

On a positive note, ISS observed that Cablevision Systems pays its directors less than its peers, that the company discloses board guidelines and that all directors are elected annually.

M&A is rampant in cable TV, with Charter Communications (CHTR) and Luxembourg telecom Altice making acquisitions and shares of Cablevision Systems have gained since Chief Executive James L. Dolan said last month that the New York market should consolidate.

The outlook for deals and management's skill at negotiating likely weighs more heavily on investors' minds than governance or even fundamentals of the business.

Although the Dolans control Cablevision Systems, they have received pressure from and made concessions to minority holders before.

Madison Square Garden (MSG), which is also a Dolan-family business, said that it would add independent directors, increase buybacks and spin off units after agitation from JAT Capital Management last year.

"ISS continues to demonstrate a bias against family-controlled companies, and we strongly disagree with their flawed report," Cablevision Systems said in response to the ISS report.

The company said that investors "understand the ownership and voting structure" that has "served investors well based on the tremendous value" since the company's 1986 initial public offering.

"Cablevision's independent board members are experienced leaders who have provided important perspective and guidance to the company, and all were re-elected by a strong majority at our recent annual meeting," the company said. - Chris Nolter


Gulf Island Fabrication (GIFI)
ISS QuickScore: 9

Gulf Island Fabrication is one of those sleepy companies that makes you wonder why it is publicly traded and whether it should be part of a larger company.


The Houston-based company, led by Kirk Meche, claims to be a worldwide leader in making specialized structures and vessels used in the oil, gas and marine industries. But it has been suffering of late from the drop in oil prices, which has put a halt to some oil and gas exploration and production activity, particularly offshore.

In the first quarter, the company earned just $100,000 on $99.2 million in sales, which were down 26% from a year earlier. Its backlog also dropped by almost half to $135 million in the first quarter vs. $253 million in the fourth quarter.

However, its cash flow improved, and the company is debt-free, which is desirable during these tumultuous times in the industry, and if it can keep from burning through its cash, the company will be in a great position when things rebound, observers say.

It would probably make sense for the company to go private in a leveraged buyout -- First Reserve comes to mind as a possible suitor -- but it would also probably be better off as part of a larger company such as McDermott International (MDR)  or Chicago Bridge & Iron (CBI), which would be able to lower costs at the unit purely due to economies of scale.

The company has a number of anti-takeover devices, earning it a 9 on ISS' governance scale. It has a staggered board, it takes a majority of shareholders to call a special meeting and shareholders can't act by written consent unless they do so unanimously.

The company also requires a super-majority to approve a merger.

Director age and longevity represent another issue. The average age of board members is 64.5 (its 98-year-old co-founder Alden "Doc" Laborde died last year and his son Jack, 64, is chairman, while Meche is 52) and director Gregory Cotter has been on the board since 1985.

The company, however, did expand its board last year, going to nine from six members, perhaps to address some of those issues. But Gulf Island doesn't have a nominating committee, something ISS would like to see when potential directors are being vetted.

Gulf Island didn't respond to requests for comment. - Claire Poole


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