Can poor corporate governance practices serve as an indicator of bad management, higher risk and – potentially – disaster?

Was3009252In the case of Massey Energy Corp., operator of a West Virginia coal mine where at least 25 people were killed in an accident this week, the answer is yes, according to a leading corporate governance research firm.

In a blog post, Kimberly Gladman, Director of Research and Risk Analytics for The Corporate Library, discusses how a company’s attention to environmental, social and governance (ESG) concerns is sometimes seen “as a proxy for management quality.”  The argument is that if companies are managing ESG risks well, “and if they have governance structures designed to hold executives accountable, they are probably generally well-organized and good at anticipating whatever may affect their business,” she writes.

That has not been the case at Massey Energy where, in addition to a well-publicized record of safety and environmental concerns, there has been “a pattern of serious issues” in governance practices, according to the Corporate Library.   Specifically:

  • Compensation for Don Blankenship, the company’s CEO, has included repeated cash retention bonuses (with no retention triggers), extensive stock and option awards, and the downward revision of performance targets in 2008 after 2007’s “proved hard to meet.”
  • Serious problems with the board, where three members received over 10% withhold votes at their last election and one of them received a majority of votes withheld. (Because of the company’s plurality voting standard, the director was not required to resign.)
  • An unusual board committee structure, with several very large committees of six or seven members each (including the Environmental, Health and Safety Committee).  “Typically, boards limit committees to three or four seats so that a few directors can focus their attention on a given area, and develop some expertise that can help guide the board as a whole,” Gladman writes. “Massey’s directors are likely to be too scattered to adequately oversee the specific issues they are charged with.”

The Corporate Library’s conclusion: “In sum, by multiple ESG measures, this seems to be a company that does not have its affairs in order.  The consequences for some employees have already been devastating; investors may also be at serious risk.

(Update April 20, 2010 – In a filing with the Securities and Exchange Commission, Massey Energy disclosed that director Lady Barbara Thomas Judge, chair of the company’s governance committee, had resigned from its board.  The company said the resignation was ” as a result of demands related to other on-going business activities and not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.”