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Red Rock Resorts’ deficient board diversity claims [updated]

Updated: Red Rock Resorts Inc. disclosed a revised diversity policy on April 26, 2022. Based on those changes, Red Rock Resorts seems to make the goal of diversifying the Board even harder to reach. In the revised policy, Red Rock Resorts stated that, while it is open to recruiting diverse candidates, it would continue to evaluate the benefits of adding new Board members against the additional costs and impact on efficiency that may result from a larger Board—a consideration that it had not stated in its prior policy. See those revisions here and the 2022 policy here. We originally published the content below on January 31, 2022.

Red Rock is the only one of the nine publicly traded Nevada-based casino gaming companies with zero women on its board of directors. Its five-person board has been the same white men since its 2015 IPO and its justification to shareholders for its board composition relies on deficient claims.

See our letter to the SEC about Red Rock’s deficient board diversity claims here here.

In the Corporate Governance – Diversity section in its 2020 and 2021 proxy filings, Red Rock tells investors that it considers gender among its diversity characteristics and then explains that:

“Gaming regulatory agencies in certain of the jurisdictions in which we operate may require our directors to maintain licenses. The licensing process is onerous, invasive, time consuming and expensive. Because of this, it is difficult to identify well-qualified candidates willing to subject themselves, as well as their families, to the rigorous and intrusive process necessary to obtain a gaming license. As a result of the limited pool of potential directors and the strong qualifications of our present Board, we believe that the current composition of our Board is in the best interest of the Company. We remain continuously open to recruiting well-qualified diverse candidates to our Board.”

There isn’t a limited pool of potential directors for Nevada-based gaming companies

There are several indicators that suggest there is not a limited pool of potential directors for Nevada-based gaming companies. Every publicly traded Nevada-based casino gaming company except Red Rock has at least one woman serving as a director, amounting to 20 out of 76 directors, or 26%, with half of them joining these boards since 2018 [1].

Nationally, women now make up 30% of all directors in the S&P 500, which is up from 28% last year and 16% a decade ago. And in the Russell 3000 index, women of all races account for 27 percent of all directors, up from 24 percent.

The pool of female directors for Nevada casino gaming companies appears to be no smaller than national averages so it is concerning Red Rock justifies its board composition through the problematic idea that if only there were a larger pool of candidates then the Board might look different.

[CHART JANUARY 27, 2022]

A gaming license is not a justifiable obstacle to board diversity

Red Rock’s claims about board diversity also rely on the problematic assumption that the pool of potential directors is too small because of the gaming license process. The gaming license process is not a justifiable obstacle to board diversity, as evidenced by the presence of women on the boards of every publicly traded Nevada-based gaming company except Red Rock.

In fact, at least in Nevada, the licensing process should present no obstacle. Nevada gaming regulation 16.415 does not require licensing of every director of a publicly traded corporation, only of directors who are actively and directly engaged in the administration or supervision of gaming activities. The regulation identifies the board chair and chair of the audit committee as among the directors who must normally be licensed.

Meaning Red Rock can elevate directors to the Board without their undergoing the rigors of the licensing process where they do not require licensing.

Red Rock has an obligation to assess the effectiveness of its diversity policy

Red Rock shareholders deserve to know whether the Company’s diversity policy is effective or not. SEC rule 229.407(c)(2)(vi) states that “if the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy.”

So, what does Red Rock mean when it states in its diversity policy that “we remain continuously open to recruiting well-qualified diverse candidates to our Board”?

Red Rock’s three independent directors, Mr. Robert Cashell Jr., Mr. Robert Lewis, and Mr. James Nave, have been on the Red Rock board since its IPO, comprise the Nominating and Corporate Governance Committee, and were board members of Red Rock’s predecessor company since 2011.

What can the Company disclose to back up the claim that the recruitment of diverse candidates is active and ongoing?

NOTE 1:

COMPANY DIRECTOR YEAR JOINED
Full House Resorts Inc. 1 Kathleen M. Marshall 2007
Golden Entertainment Inc. 2 Ann N. Dozier 2019
Monarch Casino & Resort Inc. 3 Yvette Landau 2010
Las Vegas Sands Corp. 4 Micheline Chau 2014
5 Nora M. Jordan 2021
6 Yibling Mao 2021
Caesars Entertainment Inc. 7 Bonnie Biumi 2020
8 Jan Jones Blackhurst 2019
9 Sandra Douglass Morgan 2021
Boyd Gaming Corp. 10 Marianne Boyd Johnson 1990
11 Christine J. Spadafor 2009
12 Veronica Wilson 2003
MGM Resorts International 13 Mary Chris Jammet 2014
14 Alexis M. Herman 2002
15 Rose McKinney-James 2005
16 Jan Swartz 2018
Wynn Resorts Ltd. 17 Betsy S. Atkins 2018
18 Patricia Mulroy 2015
19 Margaret J. “Dee Dee” Myers 2018
20 Winifred “Wendy” Webb 2018

Outside Shareholders Dissent at Red Rock Resorts’ Annual Meeting

Outside shareholders of Red Rock Resorts demonstrated their dissatisfaction with the company’s directors at its July 6th meeting of stockholders, with the most opposition shown toward the independent directors.

Assuming all insiders voted their Class A and Class B shares in favor of management’s recommendation, then the total outside Class A shareholder vote “for” the directors was between 59% and 71%.[i] That means between 29% and 41% of outside shareholders did not vote “for” the company’s directors

Outside Class A Shareholder Support for Red Rock’s Directors

Director Outside Class A “For” Outside Class A “For” %
Frank J. Fertitta III 47,606,865 71%
Lorenzo Fertitta 46,912,406 70%
James E. Nave 40,389,581 60%
Robert E. Lewis 40,425,855 60%
Robert A. Cashell, Jr. 39,415,189 59%


Ernst & Young reports
that only 3.8% of Russell 3000 directors received less than 80% support from all shareholders (combined inside and outside) in 2017 (YTD, 5/31/2017). Therefore, a significant number of Red Rock’s outside shareholders expressed discontent with the entire board.

Alternatively, we can look directly at the “withhold” vote. Commenting on a 2012 study commissioned by the Investor Responsibility Research Center Institute, GMI’s Ratings director of research Kimberly Gladman said: “The average level of withheld votes in a director’s election is 5 percent; companies should be concerned when the level in an election exceeds 10 percent.”

To measure shareholder dissatisfaction this way at the recent Red Rock meeting, we reduce the super voting shares held by insiders to a one share, one vote standard. This adjusted votes figure more accurately reflects the desires of all equity holders, not just the Fertitta insiders. If all shareholders of Red Rock had equal voting rights and assuming no Class B shareholders withheld their votes, then the vote results show between 9% and 16% of shareholders withheld from the company’s directors.

Adjusted Votes Withheld from Red Rock’s Directors

Director Adjusted Votes Withheld Adjusted Votes Withheld %
Frank J. Fertitta III 10,593,246 9%
Lorenzo Fertitta 11,287,705 10%
James E. Nave 17,810,530 15%
Robert E. Lewis 17,774,256 15%
Robert A. Cashell, Jr. 18,784,922 16%

Red Rock’s closing share price on July 5th (the day before the annual meeting) was down 3.1% year-to-date compared with NASDAQ Composite Index’s gain of 13.3%. As of May 8th, Class A shareholders held 58.4% of the equity but only controlled 12.9% of the vote.[ii]

Read the letter and report we sent to Red Rock’s public investors, criticizing the company’s independent directors for anti-shareholder corporate governance measures and related-party transactions and encouraging investors to withhold votes from its independent directors.

ISS recommended withholding on all of the company’s directors, which we fully supported.

See table below for how we calculated inside, outside, and adjusted votes.

Inside and Outside Votes

Share Class Number of Shares Votes
Class A Shares Outstanding 67,778,152 67,778,152
Insider Class A Shares 516,326 516,326
Outside Class A Shares 67,261,826 67,261,826
Class B Shares Outstanding 48,327,396 456,799,632
Insider Class B Shares (1 vote per share) 2,941,592 2,941,592
Insider Class B Shares (10 votes per share) 45,385,804 453,858,040
Class A + B Outstanding 116,105,548 524,577,784
*Number of adjusted votes equals the number of Class A + B outstanding

[i] At the July 6th annual meeting, Richard Haskins, President of Red Rock Resorts, said as of record date (May 8, 2017) there were 67,778,152 Class A shares outstanding, 48,327,396 Class B shares outstanding, and 45,385,804 Class B shares with 10 votes per share. These figures were used to calculate the number of Class B shares with one vote per share, the voting power and equity of each class, and to estimate the number of insider and outsider “for” votes. The number of insider Class A shares comes from Red Rock’s DEFR14A, filed on May 26, 2017, p. 47.

[ii] See note i

Why It Is Necessary to Withhold Your Vote

In a new report we argue that it is necessary for Red Rock Resorts’ shareholders to withhold votes from the company’s three independent directors – James E. Nave, D.V.M., Robert E. Lewis, and Robert A. Cashell, Jr. – on their proxies for the company’s July 6, 2017 annual stockholders meeting.

Read our report encouraging shareholders to withhold votes on Red Rock’s independent directors.

We fully support ISS’ recommendation to withhold votes on all of Red Rock’s directors.

These long-serving directors have failed to advocate for the sunsetting of the company’s myriad of poor corporate governance features since its IPO last year, and they have not acted to prevent the enrichment of company insiders and related parties. We believe it is essential to send an unambiguous message to management that investors expect a higher standard of corporate governance at a publicly-traded company, especially now that outside shareholders own a majority of the economic interest in the company.

In taking the company public, Red Rock’s board of directors implemented several antitakeover measures, including a dual-class ownership structure with 10:1 super voting stock for insiders.

Red Rock’s three independent directors are the sole members of its Nominating and Corporate Governance Committee, which is responsible for monitoring the company’s governance matters. Furthermore, Red Rock’s independent directors have a history of approving transactions that are not in the best interest of the company or its outside shareholders.

For these reasons, we encourage Red Rock’s Class A shareholders to withhold their votes from the elections from Directors Nave, Lewis, and Cashell at the company’s upcoming annual meeting of stockholders.

“Too-Big-To-Regulate”

We recently sent a letter to Nevada Governor Brian Sandoval  to provide the governor with “specific examples of problems related to the approval of the Station Casinos/Red Rock Resorts IPO by the Nevada Gaming Commission on January 21, 2016 in order to illustrate the challenges Nevada faces in regulating a ‘too-big-to-regulate’ significant owner of one of the major gaming companies in Las Vegas.”

The entire letter can be viewed here.

In the letter, we discuss the rushed nature of the approval of the IPO by the Gaming Control Board and Nevada Gaming Commission, Deutsche Bank’s accountability as the parent company and affiliate of a felon, federal regulators’ reactions to the bank’s misconduct, and the relationship between the bank and its designated director at Station Casinos, Mr. Robert A. Cashell, Jr. We also ask whether Nevada’s gaming regulators are too permissive toward “too-big-to-regulator” investors.

Our letter concludes with the following:

We cannot help but worry that Nevada gaming regulators appear unwilling to confront head-on the admittedly complex issues related to a “too-big-to-regulate” investor like Deutsche Bank, which is affiliated with a felon. We are fearful that this apparent unwillingness on the part of our state regulators might invite unwelcome scrutiny from federal officials, especially as federal regulators and investigators continue to work to hold Deutsche Bank accountable for its actions. Some might even begin to question whether Nevada is capable of upholding the “gold standard” of gaming industry regulation when our regulators continue to look the other way and refuse to ask hard questions about why the affiliate of a felon continues to own and profit from casinos in our state.

The entire letter can be viewed here.


See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Do You Want to Be a Second-Class Shareholder of Red Rock Resorts?

Read our report, “Do You Want to Be a Second-Class Shareholder of Red Rock Resorts?” 

Red Rock Resorts is proposing a corporate governance structure that will severely limit non-Fertitta shareholder influence.

  • Upon consummation of the IPO, Red Rock Resorts will have a dual-class ownership structure consisting of Class A and Class B shares voting as a single class. While the prospectus does not yet lay out the exact post-IPO numbers of LLC units, Class B shares, and Class A shares, the registration statement makes it abundantly clear that the Fertittas will control the company. Since the Fertittas, through affiliates, are currently the only owners of Station Holdco who own over 30% of the LLC Units, the “super voting stock” provision will only apply to them, assuming they maintain at least 10% of Class A shares after the IPO.
  • Studies show that dual-class structures can affect return for non-controlling shareholders, and a dual-class structure is rare in hospitality companies.
  • The newly formed Red Rock Resorts will include other anti-takeover provisions in addition to the dual-class structure and super voting stock described above.

Red Rock states its board will include three directors it considers independent: Dr. James E. Nave, D.V.M., Robert E. Lewis, and Robert A. Cashell, Jr.

  • Nave and Lewis were also part of the board of former Station Casinos Inc. when it allowed “excessive” equity compensation despite opposition from outside shareholders.
  • Mr. Cashell has served on the board of Station Casinos since 2011 when he was selected as German American Capital Corporation’s (GACC) at-will designee to own 38.58% of Station Voteco LLC, the pre-IPO sole voting member of Station Casinos LLC. Given Deutsche Bank’s multiple levels of transactions with Station Casinos – i.e. existing large LLC unit holder, lender, and IPO underwriter – we question Cashell’s independence and his ability to represent the interests of both a current and future LLC unit holder (as GACC is not selling all of its ownership interest) and new public investors who will hold the Class A shares.
  • Finally, Nave and Lewis comprised the special committee of the board of managers of Station Casinos LLC that recently negotiated the Fertitta Entertainment acquisition, in which Station Casinos will purchase the management company owned by the Fertitta family for $460 million. While it will pay a substantial amount of cash to the Fertittas and other top company executives, it is not clear what benefits Station Casinos LLC derives from the transaction.

See more of our analysis of the Red Rock Resorts/Station Casinos IPO:

Public Comments by UNITE HERE Culinary Local 226 at Nevada Gaming Commission Meeting on December 17, 2015

In October of this year, Station Casinos filed registration documents with the SEC to take the company public. These filings make it clear that Deutsche Bank will hold both voting and economic rights in Station Casinos following the offering. You will soon have to review and decide whether to approve the company’s application for a public offering.

We have previously communicated our concern that it is dangerous to allow a parent company of a felon to go unlicensed while profiting from Nevada casinos and have asked the Board and Commission to call Deutsche Bank forward for a suitability review. Now that Deutsche Bank is set to own voting rights, we believe this only furthers the need for a suitability review.

In May 2011, the Gaming Commission approved the restructuring of Station Casinos without requiring Deutsche Bank to go through licensing despite its 25% ownership. At the time, Robert Cashell, Jr. was appointed by Deutsche Bank to hold its voting interests in Station Casinos. The Board and Commission made it clear that Deutsche Bank could not interfere with the management or voting rights of its at-will designee, Mr. Cashell.

Station Casinos’ IPO filings appear to demonstrate possible direction from Deutsche Bank. The board of Station Casinos Corp., including Mr. Cashell, has agreed to set limitations on executive compensation based on Deutsche Bank ownership. Specifically, management salaries cannot exceed 105% in the second post-IPO year as long as Deutsche Bank owns at least 5% of Class A shares.

Now that Deutsche Bank is set to own voting rights in Station Casinos through its subsidiary and given the question as to whether the bank may have exercised control over its at-will designee and whether Mr. Cashell may have not acted independently, we believe this only underscores the need to call the bank forward for a suitability review. We believe this should be done even before you formally consider Station Casinos’ application for a public offering.

(For more details, see our Dec.23 letter to Nevada Gaming Commission on Deutsche Bank’s Ownership of voting rights and interference in the proposed Station Casinos IPO.)


See more of our analysis of the Red Rock Resorts/Station Casinos IPO: