The article "Electric Utility Mergers: The Answer or the Question?" (by Robert J. Michaels) in the January 1, 1996, issue, along with current events involving my employer, a midwestern utility currently involved in a merger, initiated some questions and comments regarding top executives chairmen.
We expect continued mergers and acquisitions (M&A) in the continental United States until 50 or fewer utilities serve the nation. There will be a surplus of chairmen and top executives ("Execs"), based on the reduction in companies, and the stock of developing professionals that would have filled normal retirements absent the reduction. The cost of Execs should decline, at least until the oversupply is absorbed. Current mergers suggest the opposite is occurring.
Execs of merging companies are getting job guarantees, complete with succession plans and opportunities for continued employment after being succeeded. One presumes they will also receive raises, due to greater responsibilities in leading a larger company. This is rationalized as being the only method to complete a friendly merger, else top management will not go along. I suggest four changes for utility boards during this M&A period to protect the interests of shareholders, customers, and employees from paying top dollars for redundant Execs.
First, limit internal directors to less than 25 percent of the board. This allows the remainder of the board to act in the interest of shareholders other than the internal directors, without requiring all external directors to act in concert. Mathematically, the remainder of the board, >75 percent, could override the desires of the internal directors with agreement of two-thirds of the external directors:
2/3 x >75% = >50%. Two-thirds is a high, but attainable, level of agreement within a governing body facing a controversial decision.
Second, pass the position of chairman to an external director. This reduces the number of titled positions that must be handled in a merger. An external chairman has less livelihood, and ego, on the line in choosing Execs of the merged company.
Third, eliminate golden parachutes. This helps keep the board from choosing Execs based on which one is least expensive to lay off. It may be too late to close the barn door for most, but sweetheart severance deals should be minimized to the extent possible. Economically, it seems inappropriate to greatly reduce risks to employees receiving the highest rewards, particularly in a surplus situation. Regulators may need to step in to ensure the costs of golden parachutes are borne by shareholders of the company bringing them to the merger.
Fourth, quickly lay off about half of the Execs. This will assist the merged company in attaining a vision unmuddied by too many leaders. Laying off talented people with whom directors have worked for years is obviously difficult, but just as obviously necessary. A company only needs so many Execs, and laying them off sooner facilitates future mergers, and reduces expenses. Laying off Execs should be less of an issue than laying off personnel at or below middle management, again because they have received higher rewards, compensating them for higher risks associated with top positions.
The third and fourth items will reduce costs to customers, and expenses to shareholders. The first and second items are not required to implement them, but will facilitate implementation. Taken together, they will help employees by providing a single point of leadership, and a sense that layoffs are being handled fairly.
The views expressed here are my own and are not necessarily those of my employer.
Name, position, and company omitted by request
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