The firing of “20-minute-CEO” Bill Johnson following the merger of Duke Energy with Progress Energy resulted in testimony this week before a utilities regulator and at least one lawsuit. Johnson, testifying on Thursday before the North Carolina Utilities Commission, said Duke Energy had an obligation under its merger agreement with Progress Energy to consult the Progress board on any concerns about its CEO before making substantial decisions and failed to do so.
“I will say, if the Duke board had concluded I was unable to be the CEO, there was a provision in the merger agreement that required them to consult the Progress board,” Johnson said. The North Carolina Utilities Commission, one of the state regulators that approved the deal, is legally allowed to rescind approval, is investigating whether the company misled regulators and had plans to replace the CEO earlier than announced.
In a statement released by Duke Lead Director Ann Maynard Gray Tuesday in response to the commission calling for her testimony, she said the Duke board refused to agree to a “super majority” requirement to replace Johnson when the separate entities were outlining the merger agreement.
“As a matter of policy, we refused to agree to these provisions. I believe that good corporate governance requires that a majority of the board always have the ability to replace any executive if it believes that doing so is in the company’s best interest,” she said.
“Our board felt that when you have a vote of no confidence, it’s not the type of shortfall that can be remediated, you can’t say, ‘Bill, maybe you should do x or don’t do y,’ you can’t remediate a vote of no confidence, in our opinion,” Gray testified before the Commission Friday.
Duke and Progress agreed at the outset of its $32 billion merger agreement in January 2011 that Duke Energy CEO Jim Rogers would retire at the close of the companies’ merger, and Johnson would be named CEO of the joined company, which retained Duke Energy’s name. The merger closed July 2 at 4:02 p.m.; mere hours later Gray met with Johnson to inform him he had been dismissed and replaced by Rogers, Johnson testified.
Johnson, describing events of July 2 to the commission, said, “Rogers came into my office, we chatted about the merger, about politics,” and the two went to attend a conference call board meeting at 4:30 p.m. “It took about 20 minutes, I’m elected CEO, there were handshakes, pats on the back, congratulations all around. Two hours later, I’m gone. My wife rarely buys me a new tie, it was a special day, that it ended that way was a surprise.”
The combined board at the time of the decision was comprised of 18 members—11 directors from Duke, and seven from Progress, including Rogers and Johnson, respectively. Johnson and Rogers recused themselves and a Progress director was absent from the final vote to oust Johnson.
The fiduciary duties in this situation are “the same as in all situations—to maximize shareholder value. Directors are supposed to act carefully, morally and legally,” explained Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, in an interview earlier this week. “The board has a responsibility to monitor management, and if it doesn’t see a CEO as effective, then replace them.”
“It was everybody’s hope and aspiration that he would be the president and CEO,” Rogers testified to regulators last week. “But there were a series of things that happened that led the board to change their opinion.” He cited a “loss of confidence in Bill’s ability to lead,” and the board’s concerns that Johnson’s leadership style was “autocratic.” Rogers explained he had joined three nonprofit boards in anticipation of a less demanding post-merger role as executive chairman of Duke.
To move forward as a board with trust from shareholders and regulators, Elson said, “They have to explain, and give a decent explanation, what happened in this situation, and be very clear about the reasons behind their judgments.”
A suit filed earlier this week in Delaware’s Chancery Court by Shareholder Lesley Rupp alleges that the Duke board conspired to replace Johnson with Rogers in mid-May, with Rogers informed by late June, and that the timeframe constitutes “materially misleading” involved parties. Rogers has testified before the utilities commission that he was informed of concerns about Johnson’s leadership capabilities on June 23. The commission approved the merger June 29.
Boston-based law firm Block & Leviton is also investigating a potential breach of fiduciary duty, citing Johnson’s $44-million severance package triggered by his firing. The firm noted in a press release announcing the investigation that Duke Energy stock has lost more than $1 billion in market capitalization since Johnson’s departure.
The commission also requested copies of all employment contracts with Rogers, board and committee meeting minutes since July 2010, and memos, letters, e-mails and other communications between the board and Rogers.
Elson predicts that the questions raised by the board’s decision to terminate Johnson and re-appoint Rogers CEO may make boards more cautious when entering into M&A agreements in the future, particularly around disclosure of the board’s role. “They will probably have to make it explicit that [the board] can make changes, and if you do make changes, it will be because it’s in the best interest of the company and its shareholders. It’s always been implicit, at every company, but they may need to make it explicit and make it public.”