Investors are revolting against poor corporate governance, demanding tighter controls that will boost earnings and stock price.

A new wave of activism has risen in corporate America, driven by large institutional shareholders who claim companies have not gone far enough in their efforts to embrace good governance. These institutional shareholders maintain that good governance leads to superior financial performance and will not be satisfied unless the companies do more to implement good governance policy.

The utility industry has suffered its share of the same scandals that have marred much of corporate America over the past few years, including improper accounting, market manipulation, and executive corruption. With the dramatic destruction of shareholder value and the unveiling of extreme abuses of corporate power, U.S. legislators and market makers have legislated internal structural changes to organizations, claiming that the internal controls in the companies and boards that ran these corporations had failed. The resulting legal and regulatory directives, including the Sarbanes-Oxley Act and new New York Stock Exchange and NASDAQ listing requirements, have been put into place to drive corporations to implement measures of "good governance" (see sidebar, p. 70).

Rating agencies are advocating further change, implementing systemic procedures to evaluate governance and disclosure policies, and they have begun supplying investors with more comprehensive views and ratings criteria based on these analyses. These agencies also believe that companies with clear policies of good corporate governance are less likely to be downgraded or underperform to expectations.

In the utility sector, further demands for good corporate governance also arise from state public utility commissions, some of which were the first regulatory bodies to hold hearings on the corporate scandals within the industry. Their review of corporate governance and related issues like compensation has emboldened many commissions to scrutinize further the utilities they monitor and propose regulatory changes that directly affect the operations of the utilities they regulate, or, in effect, their holding companies.

With these important stakeholders (investors, rating agencies, and regulators), actively evaluating whether utility companies have good corporate governance policies in place, utility boards and managements should be proactively considering if enough has been done to implement the spirit as well as the practice of good governance. This article will examine the goals behind these regulations, highlight the effects they are having on corporations, and pose additional questions to help companies determine if they have implemented the spirit, as well as the policy, behind good governance.

Regulation and Utilities: Have We Gone Too Far?

Many have claimed that the new regulations are unfair to those companies that had done nothing wrong. Utilities, in particular, have been highly regulated, transparent organizations that were viewed generally as good corporate citizens. Governance Metrics International, an independent group that rates corporate governance, found that, despite the scandals, the utility sector received the highest average overall rating with regard to corporate governance.

Critics of the new regulations contend that most of corporate America worked well before this new regulation was put in place and that all U.S. corporations are now suffering for the misdeeds of a few companies. They believe