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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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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