With Duke Energy, which holds its AGM today (May 1), under the scrutiny of investors such as CalPERS and the New York City Pension Funds over serious environmental issues, could the company’s CEO Lynn Good be the latest example of the ‘Glass Cliff’?
That’s the concept introduced by Michelle Ryan and Alex Haslam of the University of Exeter’s School of Psychology in 2005, which posits that women are over-represented in precarious leadership roles.
In one of the worst environmental disasters on record for North Carolina, a storm drain under one of Duke’s coal ash pits collapsed in February this year, allowing coal ash (the substance left over after coal has been burned in a power station) to leak out, coating 70 miles of the Dan River with 39,000 tons of toxic waste. Repair and prevention efforts are estimated to cost up to $5bn.
Good took over from former CEO James Rogers just in time to deal with this. She was appointed CEO in July 2013, while Rogers stayed on as chairman of the board until the end of December. In a second example of the Glass Cliff at the company, former lead director Ann Gray became chairman when Rogers stepped down. Not only that, this is a board that has been in some disarray lately – starting in 2012 when, on the merger with Progress Energy, former CEO William Johnson was removed from his position almost immediately. This resulted in the departure of three executives and two directors who resigned in protest at the board’s decision. An investigation and settlement with state regulators required the company to replace Rogers by the end of 2013. At this point he must be thinking to himself that he is well out of it.
The issue at stake here is not that the company is trying to evade responsibility for this spill, it is a governance issue that CalPERS and the NYC funds are objecting to. It is that the members of the regulatory and policy committee of Duke’s board, a committee which is supposed to deal with the non-nuclear environmental risks facing the company, was unable or unwilling to exercise proper oversight of the potential for environmental damage from these ash ponds. While the company has been on the receiving end of constant legal and other protests from environmental groups to clean up its ash ponds, this committee only met six times last year.In 2014, now that Rogers has fully stepped down and a large-scale disaster has struck, the committee has met five times already.
CalPERS and the New York City Pension Funds wrote to fellow Duke shareholders on April 14, urging them to vote against the re-election of four directors — Alex Bernhardt, James Hyler, James Rhodes and Carlos Saladrigas — the longest standing members of the committee.
Of concern is the fact that none of these directors have any relevant experience. In their defence, the company provided additional details on their qualifications in a special filing with the SEC. Unfortunately, these additional details largely refer to experience in the nuclear industry – the risks this committee is specifically not responsible for. Even odder, the defence describes the qualifications of one committee member not objected to by the pension funds, but not the other two.
In its defence also, the company has put together an impressive array of presentations – one even moderated by Glass Lewis, and another including commentary by senior political figures in the North Carolina state government.
But, according to the New York Times, environmental regulation in the state has been subject to political interference since Pat McCrory, a long time Duke employee, became governor in 2013.
CalPERS and the New York City Comptroller’s Office asked Duke to meet to discuss their concerns, including the board’s role before and after the Dan River spill. The letter specifically requested that a member of the board be present. When a call was subsequently arranged, it included only management, which acknowledged it had not conveyed the funds’ request for a director to be present to the board.
All of this controversy sat a little uneasily with Duke, which is one of the few energy companies actually to have moved to cleaner, even renewable, energy generation. The coal ash is a legacy of coal-fired power plants, many of which have been replaced by cleaner natural gas ones. In addition, I knew that part of Duke’s incentives was based on ESG (environmental, social and governance) performance measures.
So I returned to the company’s remuneration report to look more carefully at how pay was structured there. What I found was that 10% of the annual bonus is based on ESG measures, the remainder is based on an adjusted diluted earnings per share goal and operations and maintenance goals, and in most cases regulatory initiatives. The ESG measure is actually made up of six separate measures, including reliability, customer outages and so on.
There is also a safety qualifier that can detract or add 5%, but it’s based on real time injury rates etc. For the long-term performance shares there is no ESG element at all, and no performance measures at all for the restricted stock units.
While some of this might be considered in line with best practice, given the company’s potential exposure to risk in this area it is extraordinary that no measures require there to be no spills, leaks or other environmental damage, or incentivize behaviour that would help prevent such occurrences.The simple adoption of ESG measures as part of a performance management system is not guaranteed to improve ESG performance, unless the measures chosen are appropriate to the company’s risk profile and, just as importantly, influence a significant portion of both short-term and long-term incentives.
Former CEO Rogers, significantly, was rewarded solely through equity remuneration, only a tiny portion of which depended on those reliability metrics. Rogers made over $41.5m in his final year with the company.
The company’s annual meeting could be a fiery one. In addition to voting against directors on the regulatory and policy committee, funds might consider a vote against the members of the remuneration committee, or maybe against Say on Pay, in light of the failings of remuneration policy at the company.
Paul Hodgson is an independent governance analyst.