Paper Industry CEOs Getting Stale According to Moody's

Some aspects of corporate governance among North American paper and forest products companies may inhibit their ability to change quickly and keep pace with their rapidly transforming industry, says Moody's Investors Service in a new report. Among leading companies, Moody's finds unusually strong takeover defenses that may slow response to external pressure and a degree of management stability that potentially could limit fresh perspectives beneficial to management decisions.

The North American paper and forest products companies have so far largely bucked the trend among large companies of dismantling their takeover defenses, says Moody's, with a majority of the paper and forest products companies examined maintaining "classified" or staggered boards by which only a third of directors are elected each year, making takeovers extremely difficult.

"By insulating management from equity markets and other external constituencies, strong takeover defenses can reduce management's accountability and slow a company's response to business challenges," says Moody's Assistant Vice President Christian Plath.

Plath says that it may be too early to tell how entrenched the boards and management teams are amidst the industry's current challenges, but notes some firms have made significant strategic changes in recent years, including corporate reorganizations and asset divestitures. For the report, Moody's examined the governance attributes of the 12 largest Moody's-rated publicly-traded paper and forest product companies in North America.

"By insulating management from equity markets and other external constituencies, strong takeover defenses can reduce management's accountability and slow a company's response to business challenges," ---Christian Plath, Moody's

The paper and forest products companies also have managements that are remarkably stable at their top echelons. Moody's says that among the 12 companies, CEOs had been at their posts an average of eight years, longer than the six year average for the CEOs of large companies across industries. In addition, their average age was 59, compared with 55 across industries. All but two of the CEOs had been promoted from within their company, while those hired from outside were recruited from within the industry.

"A certain level of management stability is important, particularly with concerns over management retention in the current difficult operating environment," says Plath. "However, the intense pressures being felt by the leading companies—whether from shifting industry dynamics or short-term shareholder activists—calls for innovation in operations, business models, and financing strategies."

A low level of management turnover can lead to a lack of fresh perspectives in the management ranks and promote insular thinking, a concern that heightens if management becomes entrenched. "Fortunately, boards have been adding directors with broader skill sets and fresh perspectives in recent years, diminishing the risk of insular management thinking," says Plath.

Given the competitive pressures in the industry, the report notes pay structures for executives among these companies are generally positive from a bondholder perspective, because pay is tied to metrics designed to focus management on disciplined long-term investing and operational efficiency.