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The presence of conflicts-of-interest tied to Mr. Butler make the board's independent directors crucial as objective advocates for the interests of outside shareholders. As the New York Stock Exchange (NYSE) Corporate Governance Rules note:
Effective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest.
Independent directors are important for the proper governance of every public company but they are uniquely important in Eagle's case because of the strategic alliance with Commonwealth Hotels, which dictates that Commonwealth has the right of first refusal to operate a new hotel "unless a majority of our independent directors decides in good faith for valid business reasons to use another management company."48 Lack of strong independence on Eagle's board could give Commonwealth a virtual monopoly on hotel operations, even when this would be contrary to the interests of Eagle's shareholders.
The NYSE, which requires the majority of directors on the board of a NYSE-traded company to be independent, defines an independent director as "someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship. Stated most simply, an independent director is a person whose directorship constitutes his or her only connection to the corporation."49
Eagle's own Corporate Governance Guidelines are more stringent than the NYSE. They state that "at least 75% of the Company's Board should be comprised of independent, non-employee directors with no significant financial or personal ties to the Company."50
It is questionable whether Eagle is in full compliance of the NYSE rules, and its own guidelines. In its 2006 proxy statement, Eagle claims that 6 of its 9 directors - Messrs. Costello, Engel, Fisher, George, Kohlhepp and McDowell - are independent under NYSE rules.51 Even if this assertion were true, Eagle is in violation of its own guidelines which call for a 75% independent board majority. However, it appears that 4 of the 6 directors classified as independent by Eagle have ties to the company or Mr. Butler that call their independence into question:
| Director |
Classified as Independent? |
Potential Conflicts-of-Interest Held by Directors |
| Thomas E. Costello |
Yes |
Director of Corporex and holder of Eagle Operating Partnership Units |
| Thomas R. Engel |
Yes |
Consultant to Eagle and Corporex |
| Louis D. George |
Yes |
Director of law firm retained in 1997 by Key Property Development, a company then headed by Mr. Butler |
| Robert J. Kohlhepp |
Yes |
Several philanthropic ties to Mr. Butler |
| Paul S. Fisher |
Yes |
None found |
| Frank C. McDowell |
Yes |
None found |
| Thomas E. Banta |
No |
Corporex Executive Vice President, Corporex designee to Eagle board |
| William P. Butler |
No |
Eagle Chairman, Corporex Chairman & CEO, Chairman and 85% owner of Commonwealth Hotels |
| J. William Blackham |
No |
Eagle President & CEO and former Corporex Executive Vice President |
Thomas Engel (Member of the Audit Committee):
Mr. Engel is the owner and CEO of T.R. Engel Group, an asset management advisory firm that has provided services to both Eagle and Corporex:
- Corporex: According to information posted on T.R. Engel Group's website (until as late as April 26, 2006), the firm was "retained as asset manager by owner Corporex," provides "all operational, financial, marketing and strategic asset direction" to Corporex, and "developed a detailed business-building plan that addresses revenue growth and operating efficiencies. " The firm also created and implemented a repositioning plan for the Hyatt Regency Rochester52 which was bought by Corporex in 1998.53
- Eagle: T.R. Engel Group's website (until as late as April 26, 2006) also notes that it was involved in the "creation, implementation of business building plan for new upper upscale hotel."54
[The report Eagle's Albatross was publicly released on April 28, 2006. A perusal of T.R. Engel's website on July 31, 2006, indicates that all references to Eagle Hospitality and Corporex were removed from the website sometime after April 26, 2006.]
Under the new NYSE Corporate Governance Rules, "a director will not be considered independent if he or she... is, or in the past 5 years has been... an employee, director, or greater-than-20-percent owner of a firm that is one of the corporation's or its affiliate's paid advisers or consultants or that receives revenue of at least $50,000 for being a paid adviser or consultant to an executive officer of the corporation."55 If the information posted on the T.R. Engel Group's website on April 26, 2006 is accurate, it does not appear that Mr. Engel qualifies as an independent director based on this criterion.
Thomas E. Costello (Member of the Compensation & Governance Committee):
Mr. Costello serves as a director of Corporex, according to Eagle's 2006 Proxy Statement.56 The filing does not disclose whether Mr. Costello receives compensation from Corporex for his service.
Mr. Costello, in addition to his seat on Corporex's board, also held minority ownership stakes in 3 Corporex-owned hotels57 which formed part of Eagle's initial portfolio.58 When Eagle went public, it bought its initial 9 hotels from the original owners by exchanging their ownership stakes for "operating partnership" units in the Eagle subsidiary that currently owns the hotels.59 Mr. Costello received 84,381 operating partnership units for his ownership stakes in the 3 aforementioned hotels.60 On December 5, 2005, Eagle granted Mr. Costello an additional 6,065 units for a total of 90,446 units.61
Mr. Costello, like all holders of operating partnership units, is allowed to redeem part or all of his units after the one-year anniversary of the IPO. Eagle can either exchange the units for shares of common stock or redeem the units for cash.62 If the company chose to redeem his operating partnership units at the company's stock price on March 31, 2006 ($10.08 per share), Mr. Costello would receive approximately $911,695.
Robert J. Kohlhepp (Chair of the Governance & Compensation Commitee):
Mr. Kohlhepp, Vice Chairman of uniform supply company CINTAS, has a number of civic and philanthropic ties to Mr. Butler:
- CINTAS has been a major contributor to Northern Kentucky Harvest, a charity co-founded by Sue Butler, wife of Mr. Butler. CINTAS and Corporex were two of the companies initially supporting the charity.63 CINTAS has a formal partnership with the Northern Kentucky Harvest to donate clothes, and in 2002, CINTAS offered use of its viewing box at the Kentucky Speedway as a grand prize in the charity's raffle.64
- In 2004, Mr. Butler was a trustee of the Cincinnati-based Fine Arts Fund and also sat on the Nominating and Governance Committee and the "2004 Fine Arts Fund Cabinet."65 Mr. Kohlhepp became a member of the "Director's Club" after making a donation between $2,500-$4,999.66 CINTAS Corporation made a donation between 25,000-$99,000.67
- In 2000, Mr. Butler served as a director of the "Communities & Charities, Inc. Board" of the Greater Cincinnati Foundation.68 That year, the Robert J. Kohlhepp Family Fund donated $220,369.69
The relationships between Mr. Kohlhepp and Mr. Butler described above may have the effect of compromising Mr. Kohlhepp's independence, even if they are not business-related. As the NYSE Corporate Governance Rules state:
It is not possible to anticipate, or explicitly to provide for, all circumstances that might signal potential conflicts of interest, or that might bear on the materiality of a director’s relationship to a listed company... Accordingly, it is best that boards making "independence" determinations broadly consider all relevant facts and circumstances... Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others.
Louis D. George (Member of the Audit Committee):
Mr. George is Director of the law firm Taft, Stettinius & Hollister, LLP.
- In 2000, the Covington, KY office of law firm Taft, Stettinius & Hollister became a tenant of a Corporex-owned building.70 Mr. George has his office in that building.
- Mr. Charles Pangburn III, an attorney at Taft, Stettinius & Hollister (at the time) represented Key Property Development Corporation (formerly known as Corporex Properties, Inc.) in a 1997 case.71 Key Property Development Corporation's CEO was Mr. Butler and its Chief Financial Officer was current Eagle CEO Mr. Blackham.72 Mr. Butler and Corporex were co-defendants along with Key Property Development Corporation.
- In 2004, Mr. Butler was a trustee of the Cincinnati-based Fine Arts Fund.73 He also sat on the Nominating and Governance Committee and the "2004 Fine Arts Fund Cabinet."74 Taft, Stettinius & Hollister made a donation to the Fine Arts Fund between 25,000-$99,000 that year.75
As previously noted, NYSE Corporate Governance Rules state that "a director will not be considered independent if he or she... is, or in the past 5 years has been... an employee, director, or greater-than-20-percent owner of a firm that is one of the corporation's or its affiliate's paid advisers or consultants."76 Given Mr. Butler's prior patronage of the Taft, Stettinius & Hollister firm and the other ties to him and Corporex, Eagle should disclose whether it, or a Butler-affiliated company, has retained the firm in the last 5 years.
It is crucial that Eagle's board possess a strong majority of truly independent directors that can protect shareholders from the conflicts-of-interest that exist between Eagle and Mr. Butler, Corporex and Commonwealth Hotels. At this point, it does not appear to us that Eagle has such a board. |
