Views on improving the integrity of global capital markets
10 July 2012

CEO Shell Game: Duke Energy Board Flips the Switch on Progressive

Matt Orsagh, CFA, CIPM

It is not often that you see a company announce the hiring and firing of its CEO in the same document — much less on the same page (page 2). But that’s exactly what happened last week when new Duke Energy CEO Bill Johnson assumed his new position following the Duke-Progress Energy merger, and subsequently resigned.

Progress Energy shareowners who agreed to merge with Duke Energy in the understanding that Johnson would become CEO may feel aggrieved, but who cares about them anyway? They lost.

Let’s just focus on the winners: CEO/ex-CEO Johnson can qualify for up to $44.4 million for his approximately one day of service. This figure includes $7.4 million in severance, a nearly $1.4 million cash bonus, a lump-sum payment worth up to $1.5 million, and accelerated vesting of his stock awards, according to a Duke regulatory filing. Mr. Johnson gets the lump-sum payment as long as he cooperates with Duke and doesn’t say bad things about his former employer. Hard to argue with that kind of board vision and send-off.

Pop quiz: If you were paid about $5.5 million per hour (assuming Mr. Johnson worked one eight-hour day) by your former employer as long as you didn’t say anything bad about them, would you say anything bad about them?

Former investors and directors of Progress Energy were none too pleased by the Duke Energy board’s Machiavellian move, after initially agreeing that Johnson would run the merged company after Jim Rogers, the Duke Energy CEO at the time, agreed to step aside. You can read the Progress directors’ stated reasons for approving the merger here.

And who did the new board (still dominated by former members of the Duke board) appoint to replace one-day CEO Johnson? You guessed it … Jim Rogers. It seems that Progress Energy shareowners and board members made two critical errors. First, they relied on trust and integrity. Taking Duke directors at their word and ignoring the fact they had a continuing majority on the board was, as it turns out, either silly or naïve — take your pick. It is why lawyers usually paper over any such marriages.

Former Progress Energy director John Mullin III sent a letter to the editorial page of the Wall Street Journal (subscription required) laying out his concerns about the recent events. Had his fellow Progress Energy directors known Johnson would be forced out, Mullin stated, “I do not believe that a single director of Progress would have voted for this transaction as structured.”

“In my opinion this is the most blatant example of corporate deceit that I have witnessed during a long career on Wall Street and as a director of ten publicly traded companies and as a former Trustee of Putnam’s numerous mutual funds,” he wrote.

Asked for comment on Mullin’s letter, Duke spokesman Tom Williams stated, “We do not comment on our board’s deliberations.”  Well played Tom Williams.

And the Plot Thickens

The North Carolina Utilities Commission — which just approved the merger between Duke and Progress with the understanding that Johnson would serve as Duke’s CEO — is internally deliberating whether to investigate the possibility that Duke officials lied about their intentions. Commissioner Bryan Beatty on Thursday said the commission has the authority to review its decision, and that one option is to convene a public hearing, call Duke officials to testify, and question them about the move. “I think it’s important to make sure there wasn’t any intent to mislead or to withhold information from the commission that perhaps we should have been made aware of,” Beatty said.

Meanwhile, S&P put Duke’s credit rating on a watchlist for a potential credit downgrade in the wake of Johnson’s exit. Johnson’s abrupt resignation, announced Tuesday, raises questions about Duke’s internal stability, planning and management, Standard & Poor’s Financial Services said Wednesday. In contrast, Moody’s Investors Services affirmed its ratings and “stable outlooks” for Duke and Progress, citing their strong financial profiles and merger benefits. But Moody’s noted that the CEO controversy creates uncertainty over the company’s long-term leadership “and could also lead to some additional turnover in the newly-constituted company’s senior management team.”

Also, a number of former Progress executives were recruited by Johnson, with several moving to Duke’s headquarters in Charlotte this week for their new jobs. Talk about a corporate culture challenge.

Finally, the North Carolina Attorney General has opened an investigation into the matter.

It should be a hot summer for Duke Energy.

Duke Board Not Quite a “Visionary” One

In the meantime, the Duke Energy board has provided us with an opportunity for blatant self-promotion. Later this week (12 July), we will release a report on what makes a board a “Visionary Board,” or a board that:

is committed to working with management to make a company successful in the long term, does not tolerate corner-cutting strategies to meet fleeting short-term expectations, and acts as proper stewards of shareholder interests.

While you will have to wait until Thursday to read the report, we‘re providing you with a sneak peek of the six things an investor should look for when determining whether a board is a visionary one:

  • Quarterly Earnings Practices
  • Shareowner Communications
  • Strategic Direction
  • Risk Oversight
  • Executive Compensation
  • Board and Company Culture

For which of these items would the Duke Energy board receive a passing grade? I chose one, only because it wasn’t really involved in this case. I’ll leave it to you to guess which one.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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