A Boardroom Coup

I love it when the directors of a public company show initiative by replacing a chief executive who fails to meet expectations. However, such a replacement usually does not happen 90 minutes or so after the chief executive is hired.

Which is why the decision by Duke Energy’s (DUK) board of directors to dump CEO Bill Johnson looks more like a corporate coup d’etat than an exercise of fiduciary duty and sound business judgment. The question is whether anyone outside the company has any right to complain.

Johnson headed Progress Energy Inc. prior to the company’s $26 billion merger with Duke on July 2. The merger agreement stipulated that 10 former Duke directors and five Progress directors would make up the combined company’s board, and that Johnson would take the helm after the merger.

But the ink was barely dry on the closing documents when Ann Gray, a pre-merger Duke director and the new combined board’s lead director, went across the street to the offices of the company’s attorneys. She convened a meeting of the board by telephone, and in a 10-5 party-line vote, the board decided to demand Johnson’s resignation, replacing him with newly departed Duke CEO Jim Rogers.

Regulators, whose approval was required before the merger could take place, are generally not amused by these executive suite shenanigans. Johnson, Rogers and Gray have already been hauled before the North Carolina Utilities Commission, whose chairman, Edward S. Finley, happens to be a former law partner of Johnson’s. Officials in Florida are also looking into the matter.

State officials and shareholders have good reason to consider themselves blindsided. Johnson’s position at the helm of the combined enterprise was part of the merger proposal. Gray’s claims that Johnson withheld information from the board in the period leading up to the merger, especially about troubles at Progress’ Crystal River nuclear plant in Florida, lack a convincing ring, especially given the support Johnson received from the five former Progress directors. Johnson’s version of the story, which is that Duke wanted to back out of the merger and was angered by his instance that it pay Progress a contractually agreed $675 million breakup fee to do, seems much more plausible.

But not even Johnson disputes that the Duke board had the power to dismiss him. The merger agreement said he had to be hired as CEO; it did not say how long he had to remain in that post. So Johnson will move on to the next stage of his life with a very brief entry in his resume and a very large severance payment in his pocket.

We can safely assume that shareholder lawsuits against the company and the directors are on the way. But should regulators make good on their threats to consider revoking approval of the merger, which would impose substantial costs on the company’s already-abused shareholders?

Absolutely not. Without excusing any bad faith that Duke’s directors may have shown, the bottom line is that government regulators have no business trying to dictate who runs a private company, other than barring individuals with criminal or otherwise unsuitable backgrounds. Duke Energy’s leadership is properly a matter for its shareholders and their board.

Nobody can blame the regulators for being annoyed, but they ought to back off. Duke’s directors have made a very uncomfortable bed for themselves. Now they have to try to lie in it.

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