Analysis | Who’s going to fix Wynn Resorts? Not its board

Is there a corporate board in the U.S. worse than the one at Wynn Resorts Ltd.? It took two weeks for chairman and chief executive Steve Wynn to step down as a series of exposes about his alleged sexual behavior piled up. The board could’ve forced the issue sooner, I argued last week, but they were far too deferential to the co-founder of the company, someone with significant ties to many of them.

Turns out, I understated the situation. It’s now clear that the Wynn directors aren’t just weak, they’re downright awful. Under the circumstances, the directors are making the biggest possible mistake: placing the interests of an executive over that of shareholders.

This attitude was signaled from the moment Wynn stepped down. Consider the press release announcing Wynn’s resignation. It included this quote from Daniel Boone Wayson, a long-time Wynn friend who was about to ascend to the chairmanship of the board:

“It is with a collective heavy heart that the board of directors of Wynn Resorts today accepted the resignation of our founder, CEO and friend, Steve Wynn,” said non-executive director of the board Boone Wayson. “Steve Wynn is an industry giant. He is a philanthropist and a beloved leader and visionary. He played the pivotal role in transforming Las Vegas into the entertainment destination it is today. He also assembled a world class team of executive that will continue to meet the high standards of excellence that Steve Wynn created and the Wynn Brand has come to represent.”

The Friday before Wynn resigned, the board had taken a step straight out of the corporate crisis playbook: It hired an outside law firm to conduct an independent inquiry. The firm, O’Melveny & Myers, said it was establishing a telephone hotline and a website where current and former Wynn Resorts employees could report instances of sexual harassment by Wynn, according to the Wall Street Journal.

No sooner had Wynn stepped down than the board canceled the outside investigation, switching gears to its own internal investigation. And who did they name as the head of the “special committee” overseeing this internal investigation – including the allegation that Wynn paid a USD7.5 million settlement to an ex-employee he had forced to have sex with him? Patricia Mulroy, a member of the board who dealt with Wynn for decades as a Nevada state regulator.

As it turns out, the Wynn Resorts board has long been viewed as “worst in class” by corporate governance types. Institutional Shareholder Services, for instance, rates the board a “10” – its lowest ranking – meaning that the board is at high risk for governance problems.

Groups like ISS tend to rank boards based on measures like pay for performance or responsiveness to shareholders. But far more telling, in my view, have been some of the actions this board has taken over the years that seem primarily aimed at pleasing its former chairman.

For instance, around in 2010, Wynn had a huge falling out with the Japanese billionaire Kazuo Okada, the company’s biggest shareholder. It commissioned an investigation into Okada, which ended up alleging that he had violated the Foreign Corrupt Practices Act. Wynn and the Wynn Resorts board then used the result of this investigation to toss Okada off the board and forcibly repurchase his 20 percent stake in the company. The grounds cited sound especially jaw dropping in light of the recent charges against Wynn: Okada was “unsuitable” to hold a gaming license.

Okada sued, and that lawsuit is just months away from being tried. One of Okada’s contentions will be that the investigation was little more than a pretense to do what Wynn wanted to do in the first place. Indeed, the judge in the case ruled earlier this month that Okada can even bring claims against several of the Wynn Resorts board members who voted against him. If the company has more dirty laundry, this trial could air it out.

Then there’s the matter of Wynn’s ex-wife Elaine, who owns 9 percent of the stock (she was also tossed from the board). In a legal filing, she said that she learned about the $7.5 million settlement in 2009, and informed the company’s general counsel, Kim Sinatra. If confirmed, that raises an obvious question: Has the board known all along about Wynn’s sexual behavior but chose to look the other way?

In circling the wagons around Steve Wynn, the Wynn Resorts board is playing a dangerous game. Gambling is a highly regulated industry that puts a premium on the integrity of gaming operators. Regulators in Nevada, Macau and Massachusetts are all doing their own investigations into Steve Wynn and the company. They are not going to look kindly on the board’s decision to kill the O’Melveny investigation. And if it turns out that the board knew about the settlement and said nothing, or that it forced the sale of a Wynn foe’s 20 percent stake without cause – that is not going to bode well.

Belatedly, the board seems to finally be understanding this. Late Monday, it announced it was going back to Plan A, bringing in an outside law firm to conduct an independent investigation. Alas, the firm it chose, Gibson Dunn & Crutcher LLP, is one that has “deep ties” with the company, as the Wall Street Journal put it. (Among other things, Sinatra, the general counsel, is a former Gibson Dunn partner.) So it appears that the board is still trying to contain the investigation.

Now is not the time. Wynn Resorts is in the process of seeking a gaming license in Massachusetts as it builds a $2.4 billion casino complex. As difficult as it may be for individual directors, they need to finally turn their back on their former leader and start protecting the company.

I’ve complained in the past about shareholder activists attempting to replace board members for no particularly good reason other than the stock price has fallen. Here is the opposite situation: the stock is fine, but the board desperately needs to be replaced. Yet I haven’t heard a single activist – or company shareholder – say one word about the way this board is endangering this company. Carl Icahn, Nelson Peltz, Bill Ackman – they all have the resources to take a big stake in Wynn Resorts. If they sought to oust the directors, I suspect they would have plenty of support from the company’s shareholders.

So what are you waiting for, fellas? Joe Nocera, Bloomberg