CROSS THE COUNTRY, CRITICISM RISES FROM INVESTOR-owned utilities as public power agencies are drawn into regional or national markets through power pools and the geographic expansion of power...
success is defined in the regulatory process, the requirements for running generation fleets well, or what the inherent risks are in expanding non-regulated operations?
Board members also should consider ways to improve their own effectiveness by asking themselves the following questions:
- Do the independent directors adequately use the executive sessions to evaluate management and the strategic direction for the company?
- Has a peer review system been set up to provide feedback on other members' participation?
- Are there adequate training programs for directors?
- Are there effective procedures to remove board members that may not be contributing at the level of the rest of the board?
- Do board members have enough time to fully commit to the company? Are they serving on too many different boards?
Looking forward, the board should consider whether its composition is appropriate to evaluate the future business environment. Challenges for the utility sector and opportunities presented to companies are likely to grow in complexity. For example, most believe that Congress eventually will pass an energy bill, if not in 2004 then in 2005. If so, it would include a repeal of the Public Utility Holding Company Act (PUHCA), which inevitably would bring more merger and acquisition activity to the utility sector. With the repeal of PUHCA, management would be freed up to consider more extensive acquisition strategies and possibly more diversification into regulated or unregulated businesses. Do board members believe they have sufficient background to evaluate these new opportunities properly?
As utilities grow in size through mergers, their regional or even national platforms likely will attract board members from a wider pool of more qualified potential candidates.
Utility boards also should be considering if their governance structure would benefit from further structural change. Should the role of chairman and CEO be separated? The utility industry has lagged the broader market in implementing this change, with only 23 percent of the top utilities having separated the roles, versus 34 percent of 1,158 U.S. companies surveyed by Governance Metrics International.
In a related area, increased pressure from some investors has encouraged boards to take a look at their defense mechanisms, devices that many companies put in place in the 1990s and that some argue may prevent appropriate strategic dialogue on transactions that could replace incumbent management. The resulting efforts have included declassifying the boards, removing the poison pills, and eliminating supermajority voting requirements. In recent months, some utilities, such as Allegheny, Xcel, PG&E, and FirstEnergy have implemented some or all of these changes.
With investors, rating agencies, and regulators all scrutinizing utilities for their policies on corporate governance, the focus on better governance likely will not abate in the near term. Utility board members and CEOs should be reviewing their corporate policies to determine if further steps are required to embrace both the spirit as well as the letter of good corporate governance within their organizations.
Good Corporate Governance: Interpreting the Rules
What are the goals of these new regulations, and how are they defining good governance?
Many of the new good governance requirements focus on making certain that at least