CEO James Rogers faces questioning today from North Carolina officials regarding the unanticipated leadership change at Duke Energy Corporation following its $18 billion buyout of Progress Energy. The charismatic executive will be probed by the North Carolina Utilities Commission regarding the dismissal of Progress Energy CEO Bill Johnson. Mr. Johnson, who was appointed 18 months ago to be CEO of the combined entities upon the completion of the merger, was forced out on July 3, just one day after the close of the merger. The board that dismissed Mr. Johnson consisted of 11 former Duke Energy directors as opposed to 7 previous members of the Progress board.
More than just theater, today’s hearing could significantly impact the merger. Legally, the Commission could overturn approval of the unification and will be looking closely at the merger terms in addition to assessing the testimony of Mr. Rogers. The Commission’s task will be to determine whether this deal was contingent on the appointment of Mr. Johnson as CEO and whether investors were deceived by the board’s sudden change of heart. Reports indicate the Commission may never have approved the deal in the first place if it were known that Mr. Rogers would lead the combined entity. North Carolina Attorney General Roy Cooper is also investigating whether Duke Energy misled regulators.
Would-be CEO Bill Johnson is receiving a golden parachute of up to $44 million for what ultimately amounts to about a day’s work. This is a blasphemous severance package to be sure but not our main point of concern with Duke Energy moving forward. Instead, we’re trying to figure out how investors are expected to trust a board that flipped the terms of the original transaction.
Prior to today’s interrogation, neither Mr. Rogers nor any board directors have been willing to comment on the change of heart. The same cannot be said, however, for former directors “I think it was a clearly premeditated contravention of one of the most central tenets of our agreement,” said former lead director at Progress, John Mullin, who did not join the combined company. He added, “I do not believe that a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company.” Other former directors have come forward to say that the company acted in “bad faith” and that they also would have opposed the combination if told Rogers would be CEO.
But with 11 former Duke Energy directors by his side, Mr. Rogers managed to regain his chief executive status perhaps by gaining control of the board. The complexity of this task is to be determined. For example, his lead director, Ann Maynard Gray, has served on Duke Energy’s board for 18 years and is the third-longest tenured director behind two others with tenures of 21 and 22 years. Considering their directorships will survive at the newly combined entity, their loyalties may indeed lie with Mr. Rogers. Furthermore, one of these long-tenured directors is the CEO of Nucor Corporation; Duke Energy provides electric service to one of Nucor’s plants with services of about $46 million in 2011.
After this fiasco, it won’t be at all surprising if shareholders decide to pass a proposal for majority voting of directors in 2013 to replace the current plurality plus resignation policy. Over the past three years, shareholder proposals advocating majority election standards have averaged about 40% support.
Shares of Duke Energy are down more than 6% in the last week since news surfaced that regulators may have been misled by the company. The CEO switcheroo also landed Duke Energy on Standard & Poor’s negative credit watch and according to Bernstein Research analyst Hugh Wynne, the company is facing a lengthy “legal and regulatory quagmire.”
Prior to most recent events, Duke Energy scored an ESG Rating of “D” at GMI Ratings with an AGR rating in the 47th percentile of companies in North America. However, the company maintains poor ratios for Inventory/Cost of Goods Sold, Asset Turnover, and Goodwill/Total Assets. Impending litigation and regulatory challenges are likely to drive these ratings down even further. Deceitful board tactics and blatant ignorance of shareholder responsibilities threaten not only this merger, but Duke Energy’s reputation moving forward.