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Boardroom Directors: Caught in the Matrix

Building a system to evaluate the leadership's ability to meet corporate goals.
Fortnightly Magazine - June 2004

investors, regulators, and the public now have a renewed appreciation for the vital role of corporate boards.

The Sarbanes-Oxley Act and Securities and Exchange Commission decrees did much to radically reshape board structure, composition, processes, and accountability. In effect, they mandated new responsibilities and requirements. This underpinning paves the way for utilities to make their best efforts to build an outstanding board-one that is active, integrated, informed, and independent. This task is an ethical, legal, and business necessity, but it is far from easy.

With all the change the energy industry has seen at the CEO level in the past 12 months, the next generation of leaders is now stepping up to the plate. For example, new leadership has taken the helm at AEP, Great Plains Energy, Progress Energy, Ameren, PEPCO, and Duke Energy (see "CEO Forum," p. 42). This will no doubt bring new thinking to these boards and perhaps new processes for establishing and measuring even better, more effective corporate governance.

Lessons From the Past

Today, change is occurring in the boardroom. Boards are now being scored by such groups as Institutional Shareholder Services and the Corporate Library. Governance Metrics International (GMI), another corporate governance research and rating agency, rates 2,100 global companies, and only 22 received its highest rating. As a group, these 22 outperformed the S&P 500 index as measured by total returns for each of the last one-, three-, and five-year periods by 4.3 percent, 9.2 percent, and 6.9 percent, respectively. Entergy Corp. and Wisconsin Energy Corp. are the only utilities among this group of 22 companies receiving GMI's highest rating.

Ethics Test

Now that the issue of compliance is behind most boards, the next test will be one of ethics. The marketplace will reward utilities that meet the demand for integrity (see "Boardroom Revolution," p. 67). Integrity starts at the top with steadfast governance of CEO compensation, succession planning, and leadership development practices setting the tone for the rest of the organization.

Companies whose leaders have the imagination to envision their boards as a unique strategic asset to both management and shareholders will move themselves and their organizations ahead of the pack by being the first to recognize that exceptional governance simply makes companies better.

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