GMI Ratings Governance Issue | The McGraw-Hill Companies

The McGraw-Hill Companies said on Monday that Freddie Mac’s former CEO Charles E. “Ed” Haldeman Jr. has joined its board. Increasing the number of people supervising the New York information services provider is a step in the right direction, but McGraw-Hill’s managers could still do more toward safeguarding their investors’ best interest.

McGraw-Hill’s board now has an extra member, bringing the total to 13. The company said in a statement that the 63-year-old Haldeman joined Freddie Mac in 2009, a year after the government-established mortgage enterprise was placed in conservatorship. McGraw-Hill said Haldeman stabilized Freddie Mac “by building a new management team, reducing expenses and improving the quality of loans.”

But Haldeman’s record isn’t spotless. In March 2011 the inspector general admonished the Federal Housing Finance Agency, which supervises Freddie Mac, for awarding multimillion pay packages to senior officers.  The regulator in September 2011 also protested that Freddie Mac used a loan review process that wasn’t expansive enough and potentially cost unnecessary billions as a result. The next month Haldeman announced his intention to step down as CEO this year.

Haldeman joins McGraw-Hill as it continues to carry out a plan announced in September 2011 to separate into two public companies: McGraw-Hill Financial and McGraw-Hill Education. Haldeman had served as president and CEO of Putnam Investments before joining Freddie Mac, and led the firm through a transition during which he worked closely with regulators to establish new operating principles, governance processes, and investment oversight and standards. In 2007, he led the sale of Putnam to Canada’s Power Financial Corporation.

“Ed brings keen insights given his considerable experience and expertise in financial markets, excellent judgment and his strong record of working with regulators,” McGraw said in the company’s statement Monday.

That sounds nice, but McGraw-Hill could do more to improve its board. When GMI analyzed the company’s proxy statement this spring, we found problems that led us to downgrade the company’s rating to a D from a C. Seven of McGraw-Hill’s directors have served more than a decade, including Robert P. McGraw, Pedro Aspe, Winfried Franz Wilhelm Bischoff, and Sidney Taurel. The long-tenured directors make up the majority or chair four of the five standing board committees at McGraw-Hill.  While we recognize the benefits of experience, we feel directors should have relationships that are distant enough for them to be able to act independently and thus provide effective oversight. Adding Haldeman to the board doesn’t yet entirely solve that dilemma.

Despite such risks, McGraw-Hill’s stock price has risen by 6.6% in the past year to trade at $45.18 per share near closing time Monday.

The lack of oversight does hit investor wallets. McGraw-Hill’s board of friends and family awarded chairman and CEO Harold W. McGraw III $8.74 million in fiscal 2011, well over three times the median for the other named executive officers. His compensation includes costs associated with his use of sleeping quarters in the McGraw-Hill building and his travel in company cars and aircraft – even to board meetings for ConocoPhillips and United Technologies Corporation. While some of these expenses may be more work related than others, they are not directly tied to company performance, making it harder to explain what they do for investors. CEO McGraw is also entitled to a potential payment of about $17.7 million in the event of termination following a change in control.

As the company undergoes its pending split and overhaul, the resulting uncertainty has made its financial statements reflect an AGR score of 17, indicating more accounting and governance risk than 83% of companies. This doesn’t mean that McGraw-Hill is doing anything wrong, but it would definitely help if the company had more than one set of extra eyes to watch its business. Maybe the McGraw family sees otherwise.

Region:   North America
Sector:   Cyclical Consumer Goods / Services
Industry: Publishing
Market Cap: $ 12,069.1mm (Large Cap)

ESG Rating:   D
AGR:   Aggressive (17)

 

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