When The National Association of Corporate Directors voted E. William (Bill) Barnett, lead director at Reliant Energy, as Director of the Year for 2005, it lauded him for his leadership when the Houston-based utility was working through a number of accounting-related restatements and governmental probes and lawsuits.
Barnett
“Barnett's leadership during this difficult period was invaluable as he worked with the board to address the company's most pressing financial, legal and regulatory issues and to rebuild Reliant Energy's credibility and viability as an ongoing concern,” it said in making its announcement.
It credited Barnett, the retired managing partner of Baker Botts and current chairman of Reliant’s Nominating and Governance Committee, with building a strong and active board by recruiting new directors and implementing a successful transformation of the company's governance processes. As a result, Reliant has “established new corporate governance guidelines and committee charters and expanded its business ethics policy,” the NACD added.
Raber
"Effective corporate governance is dependent not only on sound processes and policies, but also on people like Bill who have the courage and candor to ask tough questions," said Roger Raber, NACD President and CEO, in a press release.
Indeed, governance experts are impressed with the policies of Reliant’s governance Committee, which Barnett chairs. Specifically, it conducts an annual orientation as well as continuing education programs for directors. It also evaluates each board member each year to determine whether they are suitable to remain as directors. “This is an excellent example of good corporate governance,” says Gene A. Capello, managing director of Proxy Governance’s policy staff, which is responsible for the development of the firm’s proxy analysis policies.
Barnett, a veteran of the law firm Baker Botts who has served on the Reliant board since Oct. 2002, is a former chairman of the board of trustees of Rice University and life trustee of The University of Texas Law School Foundation. A well-connected lawyer with ties to the first President Bush through Baker Botts veteran and former Secretary of State James Baker III, Barnett sits on a Texas regional advisory board of JPMorganChase, which also includes Reliant Energy CEO R. Steve Letbetter.
And certainly, Reliant has had to come a very long way.
In 2002, the company admitted to engaging in so-called “round trip” trades to overstate revenues, and said it would restate results for 1999, 2000 and 2001. In June of 2002, the company disclosed that it had received a formal order of investigation form the SEC concerning those trades. In May 2003, the Commission initiated administrative and cease-and-desist proceedings against Reliant Energy and Reliant Resources, and the company settled by consenting to the entry without admitting or denying the findings.
In April 2004, a federal grand jury charged Reliant Energy Services, Inc., and four of its officers in connection with a federal criminal probe of the manipulation of the California energy markets.
And back in March of this year, the SEC settled a cease-and-desist order against former Reliant Chief Risk Control Officer Eddie Richard Meche stemming from the company’s round-trip trades. He also agreed to pay a $25,000 civil penalty.
The SEC also filed a complaint against Tamela Charisse Whitlow, Reliant’s former head of energy trading, asserting she was “instrumental in orchestrating the round-trip trades and was the most senior Reliant officer to approve them.”
Just last week, Reliant Energy agreed to settle all shareholder class action lawsuits related to the alleged violations. The settlement, which is subject to court approval, provides for a total settlement payment by Reliant of $68 million, of which $61.5 million is covered by Reliant's director and officer insurance policies. Reliant will make a cash payment of $6.5 million as part of the settlement and pay certain costs associated with the defense of the litigation. Deloitte & Touche, another defendant in the litigation, agreed to make a payment of $7 million, bringing the total value of the settlement to $75 million.
About Average
Given the company’s recent rogue past, Barnett’s Director of the Year distinction seems curious at the very least. It also seems somewhat incongruous with the rest of the company’s governance record, which—though much improved from its scandalous days—is still far from industry “best practices,” according to those who are in the business of rating corporate governance practices.
Anderson
“It scores about average,” asserts Gavin Anderson, CEO of governance rating firm GovernanceMetrics International. Anderson, who rates companies every six months, says Reliant “basically tracked its 73 peers” through August 2004.
In February, the company moved up in the rankings to its current rating, which places it “above average.” But the reason is unclear; in fact, the improvement may be due to changes at peer companies, not necessarily because Reliant’s governance practices got better. “There is nothing to indicate why it improved,” Anderson says, poring over his firm’s analysis.
McGurn
Institutional Shareholder Services, which also rates the governance practices of public companies, agrees that Reliant’s policies and procedures are about average; the firm considers Reliant better than just 52.7 percent of the Russell 3000 companies and only better than 18.9 percent of utilities companies, based on its proprietary Corporate Governance Quotient. “The governance practices at Reliant Energy fall near the median for their market cap peer group and towards the bottom of the utilities industry peer group,” elaborates ISS’ Patrick McGurn.
He says the primary reason for this is the significant number of takeover defenses and “other shareholder-unfriendly charter and bylaw provisions” that are in place. Indeed, while Reliant received the highest score for Board issues and Audit Review practices, it received the lowest ranking—in a scale of one to five—when it comes to its takeover defenses, and the second lowest ranking in the area of executive and director compensation and ownership. For example, Reliant still has a staggered board of directors. And at the most recent annual meeting, it opposed a shareholder resolution calling on the company to declassify its board.
“The Board believes that a classified board can play an important role in ensuring that the interests of all stockholders are protected in connection with an unsolicited takeover proposal,” Reliant asserted in its most recent proxy, explaining why it urged shareholders not to vote in favor of the measure. “Absent a classified board, a potential acquirer receiving a simple plurality of the votes cast at an annual meeting could replace a majority of the Board with its own nominees and thereby gain control of the company at a single meeting without paying a premium to the company’s stockholders.”
It also disagreed that classified boards make directors less accountable to stockholders, arguing, “The fiduciary duties of directors elected to three-year terms are identical to those of directors elected annually.”
ISS also criticizes the company for having a poison pill that was not approved by shareholders. In addition, a supermajority vote of shareholders is required to amend certain provisions of the charter or bylaws.
“F” For Compensation
Governance experts are also critical of the company’s compensation policies. For example, Proxy Governance, which overall has a positive view of Reliant’s governance policies, points out in a recent report that Reliant’s three-year average executive compensation is above the median of the company’s peer group. The average compensation paid to the CEO has been approximately 90 percent above the median paid at peer companies, while the average compensation paid to the other named executives has been approximately 50 percent above the peer median. “That’s one of the major issues that we look at,” Capello stresses.
For its part, in 2004 Glass, Lewis & Co. gave Reliant's executive compensation an F grade in its proprietary pay-for-performance model. “Overall, the company paid significantly more than its peers, but performed worse than its peers,” it added in a recent report.
In 2005, it raised this grade, but only to a C. The firm acknowledged that Reliant paid less compensation to its top officers than the median compensation for 40 similarly sized companies with an average enterprise value of $11 billion. The company also paid more to its executives than a sector group of 64 electric utilities companies, and about the same as a market cap segmented industry group of 21 large utilities companies.
The firm also pointed out that Reliant’s CEO was paid about the same as the median CEO in these peer groups. “Overall, the company paid about the same as its peers, but performed worse than its peers,” it added.
ISS also criticized Reliant for not expensing stock options, a point that is ostensibly irrelevant as all companies will be required to do so under new rules promulgated by the Financial Accounting Standards Board.
Experts note that if you add up all the data, it appears that Reliant has improved its governance practices over the past few years as it tries to shed its past, but still falls short of the types of “best practices” against which governance firms benchmark performance. “The real governance gut check for the Reliant board comes now,” opines McGurn at ISS. “Reliant reportedly received a majority vote on the repeal classified board proposal on its ballot at its recent annual meeting: Will the board respond to this mandate? If not, the directors (at least those in the class up next year; Barnett was up this year)could face a large withhold vote.”
Defending The Decision
NACD president and CEO Raber sticks by the Barnett decision, largely because the award is given to an individual, not a corporate board.
"While it is true that Reliant's board does not engage in all the practices that might be considered good board practices, the NACD Director of the Year honors an individual director, not an entire board," wrote Raber in an email to Compliance Week.
In addition, Raber notes that the NACD got the input from governance experts during deliberations. "As part of our due diligence on our nominees, we asked Nell Minow, a distinguished member of our Advisory Board, for The Corporate Library's evaluation of our nominees' boards," wrote Raber. "Reliant received a grade of 'B.'"
In justifying the 2005 NACD award recipient, Raber provided the criteria used by the association in selecting its Director of the Year. According to Raber, the candidate for Director of the Year must [to the best of the nominator's knowledge]:
Be a distinguished director of a top performing public company with a proven track record in achieving consistent long-term profitability and/or overcoming extreme adversity.
Possess an excellent leadership reputation, especially in governance and ethics.
Be recognized by peers and the business community as a role model in promoting high professional standards for board and director performance.
Adhere to NACD recommendations (e.g., not serving on too many boards—see NACD's Blue Ribbon Commission Report on Director Professionalism).
Serve as a mentor to current and aspiring directors.
While not required, additional activities that are looked upon favorably by the selection committee include serving on private company boards and corporate responsibility activism.
"From all accounts, Mr. Barnett meets and far exceeds all of the above criteria," wrote Raber. He also noted that Barnett adheres to NACD recommendations of serving on only two public company boards, owning significant stock in Reliant Energy, and holding a 100 percent attendance record at Reliant board meetings.
Raber also noted that Barnett helped Reliant emerge from its numerous securities and governance challenges. "When Mr. Barnett became a director at Reliant, the company was experiencing difficulties on a variety of fronts," wrote Raber. "We received 20 letters from Mr. Barnett's colleagues, many of whom detailed how, as lead director, he led a successful transformation of Reliant's board processes and helped initiate a turnaround of the company's finances."
In addition, Raber notes that the rebound of the company's stock further validate the distinction. "On October 1, 2002, the month Mr. Barnett joined the board, Reliant's stock traded at $1.99," wrote Raber. "This morning [July 25], the stock is at $12.89, a more than 600 percent increase."
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