Low Corporate Governance for Controlled Companies

Western Refining is an American company that operates as an independent crude oil refiner and marketer of refined products. The New York Stock Exchange (NYSE) traded company commands a price/earning ratio of 33.3, a dividend yield of 4.23% and a market capitalization of almost US$4 billion. In November last year its share price rose by 28% on the back of news that it was being acquired by another company Tesoro, its attractiveness being an efficiently run set of refining and distribution assets that were well distributed between wholesale and retail segments. But here is the interesting bit: Western Refining is a controlled company.

The NYSE defines a controlled company as a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group and has rules for controlled companies.
So in one of their regulatory filings, this is what Western Refinery disclosed:
“Under these (NYSE) rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including:

• the requirement that a majority of our board of directors consist of independent directors;
• the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors
• the requirement that we have a compensation committee that is composed entirely of independent directors

We presently do not have a majority of independent directors on our board and are relying on the exemptions from the NYSE corporate governance requirements set forth in the first bullet point above. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Mr. Paul Foster [and others] own approximately 55% of our common stock. As a result, Mr. Foster and the other members of this group will be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. ….The interests of Mr. Foster and the other members of this group may not coincide with the interests of other holders of our common stock.”

As of the time of writing this, Western Refining’s share was trading at $35.94 with an annual average daily volume of shares traded slightly above 1 million. The point is that there is a certain investor who cares less about how management is being compensated or monitored by an independent board and more about what their return on investment is, via capital gain on the share or dividend yields. I know you’re probably thinking who the black Jack is Western Refining anyway? It’s a random company I picked because it plays by the same rules as Warren Buffet’s Berkshire Hathaway, Facebook and Google. All these companies, and many more, are controlled companies trading on the NYSE. ISS Governance, an independent corporate governance rating agency, gives NYSE and NASDAQ traded companies a quality governance score based on four pillars: audit and risk oversight, board structure, shareholder rights and Compensation. On a graduating scale of 1 to 10 with the latter being the lowest score and evidence of higher corporate governance risk, Western Refining fares pretty well as it gets an overall score of 3, and pillar scores of 2 for audit, 7 for board structure, 2 for shareholder rights and 5 for compensation. Meanwhile, the Sage of Omaha Mr. Warren Buffet’s Berkshire Hathaway has an overall governance score of 8, with pillar scores of 1 for audit, 9 for board, 9 for shareholder rights and 4 for compensation. Alphabet, which is Google’s parent company has an overall governance score of 10, yes you read that right, 10 which is the lowest score, with pillar scores of 2 for audit, 10 for board, 10 for shareholder rights and 10 for compensation! Next week I’ll delve deeper into why this information should interest the ordinary Kenyan business.

Twitter: @carolmusyoka