Wynn Resorts’ Stock And Importance Of Corporate Governance

The #metoo movement is now coming to corporations. After a year of success, Wynn Resorts (NASDAQ:WYNN) has seen its value fall by nearly 20 percent in two days since the Wall Street Journal reported that casino mogul Steve Wynn had sexually harassed or assaulted multiple women. Wynn has denied the allegations and remains CEO of Wynn Resorts, but was forced to step down as the finance chairman of the Republican National Committee.

If investors wish to divest themselves of Wynn Resorts because they find the allegations against Wynn credible and do not wish to associate themselves with the company for ethical reasons, there is nothing wrong with that. But there are also practical reasons to believe that the allegations no longer make Wynn Resorts a value investment.

Wynn Resorts could be attacked on multiple fronts, from losing Steve Wynn’s genius to facing a backlash from consumers to facing government investigations of their licenses. Furthermore, other companies have to look at Wynn Resorts’ struggles and gain a newfound appreciation of proper corporate governance and taking a firm stance against sexual harassment.

Wynn Resorts and Wynn

Steve Wynn has been in the casino business for 50 years and built multiple casinos before founding Wynn Resorts in 2002. But because he is such a titan in the casino industry, Wynn Resorts would suffer far more without his genius than other companies would upon losing their CEO. According to Fortune, J.P. Morgan analyst Joseph Greff wrote that “a scenario where (Wynn resorts) doesn’t have Steve as a CEO is not good for the company.” Wynn Resorts sets itself apart from its competitors largely through Steve Wynn’s leadership. Without him, they are just another casino chain.

However, Wynn Resorts may not lose Wynn. As noted above, Wynn has denied the allegations and there is currently no indication that he plans to resign. But if Wynn does stay, Wynn Resorts faces an even more serious problem of having their gambling licenses reexamined. Most gambling licenses require their owners to exhibit good character, and multiple U.S. states such as Massachusetts and Nevada have announced that they are reviewing his gaming license.

What probably has Wynn Resorts most worried is not the United States, but Macau. Most of Wynn’s adjusted earnings come from Macau, the only area of China where gambling is legal. In Wynn Resorts’ most recent earnings report last week, they beat expectations in earnings per share and net sales on the strength of their Macau properties despite a decrease of sales in Las Vegas.

Wynn Macau (HK:1128) shares in Hong Kong fell, though not as much as the United States. There have been some suggestions that because the #metoo movement is not as large in China compared to the United States, Wynn Resorts will be able to rebound through their Macau casinos.

But on Tuesday morning, the Washington Post reported that Macau regulators will “seek more information about sexual misconduct allegations against the Las Vegas billionaire” and were concerned about the reports. This is incredibly bad timing for Wynn since he will have to renegotiate their licenses in 2019. While China will probably not drive Wynn’s businesses away, they will almost certainly hope to use these allegations as leverage to squeeze Wynn more. This is especially true given high Chinese levels of debt as well as the fact that Wynn has lost political leverage due to his RNC resignation.

Corporate Governance and Wynn

The fundamental question which those interested in Wynn Resorts have to answer is this: how badly will the company be affected by the sexual harassment allegations? Remember that Las Vegas based Wynn is the first public CEO since the rise of the #metoo movement to be accused, and the company will likely lose customers Vegas payday loan companies as a result. Remember that as noted above, Wynn Resorts’ Las Vegas sales fell last quarter even before these allegations came out.

But the buck may not stop at just Steve Wynn, as the board may be at risk of civil lawsuit for failing to act earlier. The board may argue that they are not responsible for tracking Steve Wynn’s personal conduct, but that may not fly as well in an environment of growing concern about sexual harassment.

Some investors may look at Wynn Resorts’ drop, conclude that the hullabaloo over Steve Wynn’s actions will blow over, and aim to buy low. But there are more reasons to believe this will materially hurt Wynn Resorts. If Steve Wynn leaves, the company will suffer. If Steve Wynn stays but they risk losing a license or paying more to the Chinese, the company will suffer. If the board faces a civil lawsuit, the company will suffer.

The #metoo movement means that corporations cannot just brush aside sexual harassment allegations and bounce back easily. Corporations everywhere will have to review their corporate governance and sexual harassment standards to make sure that they do not end up like Wynn Resorts, and investors should not consider investing into this company now.