Poor corporate governance and questionable accounting practices.
That's what these 10 big companies have in common, according to a list compiled for us by GovernanceMetric's International, an independent research firm that analyzes business risk.
According to GMI, all these companies present a "high level of concern" for both their short and long-term prospects thanks to a variety of risky management issues -- ranging from exorbitant executive compensation to lack of board independence.
This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Have an account? Log in.Hewlett-Packard (HPQ)
Environmental, social and governmental risk:
HP has been plagued by board dysfunction for much of the last decade, marked by a "long string of questionable strategic and personnel decisions" according to GMI.
The company is now on its third CEO in less than two years. These moves have shaken confidence in the company’s leadership and destroyed a ton of shareholder value.
And in 2010, the United States joined German and Russian authorities in investigating whether HP executives paid millions of dollars in bribes to Russian officials to win a contract in Russia.
Accounting risk:
Accounting red flags center on asset and liability issues, as well as the fact that the debt to equity ration increased even further in 2011.
Wells Fargo (WFC)
Environmental, social and governmental risk:
GMI cites both board and compensation concerns at Wells Fargo.
Three executive officers receive at least $2 million and CEO John Stumpf’s base salary is in the top 10 highest salaries for reported S&P 500 CEOs so far this year. Stumpf's annual incentive award is not capped, has no pre-determined target and includes qualitative performance objectives.
In relation to board leadership, there are five directors who have served for more than a decade and seven directors who serve on at least three other boards. GMI questions whether they have the time to devote to the Wells Fargo board and be effective.
GMI also noted that the independence of Lead Director Phillip Quigley may be compromised by his long service (17 years) and the employment of his son, Scott Quigley, who is an institutional relationship manager in the company’s Wholesale Banking group.
Accounting risk:
GMI says that accounting risk at Wells Fargo is heightened by an active stream of divestitures, mergers and restructurings.
Caterpillar (CAT)
Environmental, social and governmental risk:
Caterpillar has both compensation and board issues, according to the GMI analysis.
Despite his 2010 retirement, former CEO James Owens received summary compensation of $22,545,984 -- nearly four times the median summary compensation for the company's seven other execs. His compensation also includes a grant of restricted stock units that vest after time without any performance-based criteria.
In terms of board management, eight directors have served for at least a decade, including four who are at least 70, which raises succession planning concerns as well as questions of board independence.
Accounting risk:
GMI's accounting red flags are concentrated around the valuation of company assets and liabilities. The company also has lower liquidity and is more leveraged more than its peers. relative to peers and liquidity low. Lower levels of administrative and operating expenses suggest questionable accounting, according to the analysis.
Transocean LTD (RIG)
Environmental, social and governmental risk:
Transocean, the offshore drilling contractor that owned the rig involved in the 2010 Deepwater Horizon disaster, has faced a bunch of lawsuits over environmental damage and personal injuries caused by the oil spill.
There's also a securities class action complaint against the company and the CEO regarding violations of securities laws in connection with the providing of false and misleading statements. Last fall, the U.S. government cited Transocean, PB plc, and Halliburton Company for violating oil industry regulations.
GMI also worried about executive compensation at Transocean. Former CEO Robert L. Long’s 2010 total summary compensation of more than $15 million is nearly four times the median of the other execs there.
Accounting risk:
In addition to questionable accounting concerns, GMI cited an aggressive assumption for the company's expected return on pension assets.
Constellation Brands (STZ)
Environmental, social and governmental risk:
Compensation arrangements of key executives at Constellation Brands may not be in the best interest of non-family shareholders, according to GMI.
The Sands Family Stockholder Group controls more than 55 percent of the company's voting power. In 2010, the Chairman and CEO received large grants of market-priced stock options and got over $9.3 million from the exercise of options. Plus, market-priced stock options may provide rewards due to a rising market alone, regardless of individual performance.
The company also pays for the officers' personal use of the company’s plane, which totaled $605,241 in 2010.
Accounting risk:
Expense and Revenue recognition issues, high inventory ratios relative to peers, high accounts receivable and sales numbers are some of the indicators that suggest questionable accounting practices, according to GMI.
L-3 Communications (LLL)
Environmental, social and governmental risk:
Much of GMI's concern about L-3 Communications, a defense contractor, is related to executive compensation.
Payouts from the company's annual performance bonus plan are made on a discretionary basis, as opposed to being based on achievement of pre-established performance targets. The CEO’s pension increase of more than $2.7 million is twice his base salary and more than the combined base salaries of the other named executive officers.
The CEO is also entitled to more than $24 million if terminated following a change in control.
Accounting risk:
L-3 Communications' pension-related assumptions for expected return on assets are aggressive relative to industry peers, while the company's cash ratio is low relative to peers.
Cliffs Natural Resources (CLF)
Environmental, social and governmental risk:
Cliffs Natural Resources has both governance and social issues, according to the GMI analysis.
Three of its subsidiaries have received official orders citing certain safety violations since December 2010.
In the event of a termination following a change in control. the CEO is entitled to nearly $32 million total -- that's more than 39 times his base salary.
Accounting risk:
An uptick in sales numbers along with a decline in the cost of the goods sold suggest questionable accounting practices, according to GMI.
SandRidge Energy (SD)
Environmental, social and governmental risk:
SandRidge Energy was given GMI's lowest rating for concerns including executive pay and benefits related party transactions.
Shareholders have registered serious concerns about the company’s pay practices. Three of the biggest areas in question were the unclear relationship between compensation and performance, a short-term policy orientation and concerns about internal pay equity.
SandRidge also discloses very little information about its approach to handling its environmental and social risks and opportunities, which may raise concerns for investors, according to GMI.
Accounting risk:
GMI cites a steady stream of divestitures as increasing accounting risk, while an unusual jump in operating revenues and expenses suggest potential accounting issues.
PPL Corporation (PPL)
Environmental, social and governmental risk:
With PPL Corporation, GMI again singles out executive compensation as a big red flag.
The company's annual performance bonus plan is discretionary with payouts, and it's not based on hitting pre-established performance targets. And the CEO is entitled to over $24 million in the event of a termination following a change in control.
Accounting risk:
PPL's accounting flags stem from a high number of divestitures and mergers relative to industry peers.
Scientific Games (SGMS)
Environmental, social and governmental risk:
Scientific Games received a low rating from GMI because of the excessive influence of dominant shareholder Ron Perelman, along with poor executive compensation policy.
Accounting risk:
Revenue and expense recognition concerns suggest questionable accounting practices, according to GMI.
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