Goldman Cites Dell, EMC, IBM

For shareholders in these post-bubble days, corporate honesty isn't enough. They want proof that financial statements are solid and boards impartial. And a recent report from Goldman Sachs & Co. says three companies in their covered universe of storage and system players are on the right track.

Dell Computer Corp. (Nasdaq: DELL), EMC Corp. (NYSE: EMC), and IBM Corp. (NYSE: IBM) ranked highest in a qualitative analysis of the financials, boards, and ownership stability of firms covered by Goldman researchers.

"Dell, EMC, and IBM were the most consistent, pulling ahead of the pack by ranking well across most metrics," write report authors Laura Conigliaro, Brenden M. Smith, and Jean Liu. "Our overall leaders exhibited several best practices including a detailed disclosure of supplemental financials, a highly independent board, and a transparent ownership structure."

In contrast, two of Goldman's covered companies in the segment -- QLogic Corp. (Nasdaq: QLGC) and Sun Microsystems Inc. (Nasdaq: SUNW) -- didn't fare as well, mainly because their books aren't open enough. "[T]hese two companies seem only to release the bare minimum, withholding much of the detail that investors need to better analyze their businesses," the report states.

Neither Qlogic nor Sun had responded to calls about the report at press time.A raft of other companies wound up in the "middle of the pack," with varying levels of good corporate governance metrics that didn't stand out either way. Included in this bunch were Brocade Communications Systems Inc. (Nasdaq: BRCD), Emulex Corp. (NYSE: ELX), Hewlett-Packard Co. (NYSE: HPQ), Lexmark International Inc. (NYSE: LXK), McData Corp. (Nasdaq: MCDTA), Network Appliance Inc. (Nasdaq: NTAP), Seagate Technology Inc. (NYSE: STX), Storage Technology Corp. (StorageTek) (NYSE: STK), and Veritas Software Corp. (Nasdaq: VRTS).

Table 1: Goldman Sachs Research Rankings Distribution for Overall Corporate Governance

Dell, EMC, HP, Sun, and Veritas consistently release all their financials at once, earning kudos. Dell, EMC, IBM, and Veritas also were praised for the quality of their supplemental disclosures. These include revenue breakouts by segment and product, acquired assets, geographic areas, customers contributing over 10 percent of sales, and units shipped.

When it comes to the mid-tier companies in the report, nearly all covered companies lack sufficient detail in their financial reporting, Goldman says. While HP releases a lot of supplemental information, for instance, it doesn't do so consistently quarter-to-quarter. Emulex and McData don't reveal how much they make in revenue from acquisitions. Qlogic does not provide a cash-flow statement. Sun and Qlogic skimp on product revenue breakouts and segment information.

Companies were also judged on actions they've taken to reduce employee stock options and equity-based compensation. Dell, EMC, Emulex, IBM, Lexmark, NetApp, and Veritas have reduced option grants the most, the report says. But Brocade has work to do, having granted nearly 17 percent of its outstanding fiscal year 2003 shares in the form of options.The report also analyzed the boards of system and storage companies to see which ones had the most independent boards and the most dispassionate reporting structures. Here, NetApp won out because it has a separate CEO and chairman, elects board members annually, and has 88 percent of its board independent of any affiliation or interest in the company.

When it came to having a good balance between internal and external shareholders, Brocade, Dell, EMC, IBM, Lexmark, NetApp, and StorageTek made leader status. These companies strive for equitable voting rights among all shareholders and resist practices that give too much weight to specific kinds of shareholders, Goldman says.

Bottom line? Corporate governance in the storage and system sector is still "a work in process," the report states, but improvements will drive up investors' willingness to spend a premium on stock, upping performance of well-governed companies over time.

Mary Jander, Site Editor, Byte and Switch