Most recent scandal shows that a disconnected board and a culture of over-deference to management continue to plague Canada’s largest electrical utility.
It’s like that Amityville house. Perfectly normal CEOs and directors go in and come out totally dysfunctional and disconnected with the world around them. That seems to be what happens with Hydro One, Canada’s largest electrical utility, on a regular basis. The most recent episode involves highly critical findings by Ontario’s Auditor General, who documented irregularities in financial controls at the organization. It eventually led to a government which was outraged, a board which appeared clueless and a CEO who suddenly resigned. It’s all been played out before.
As The Centre for Corporate & Public Governance points out in a recent media statement, this is just the latest in a long series of scandals, resignations and board embarrassments. In addition to uncovering a woefully inadequate system of controls regarding the use of Hydro One credit cards, and some $127 million in undocumented expenses over the past year, the Auditor General found that CEO Tom Parkinson was getting his personal assistant to charge his expenses to her corporate credit card. He then approved the expenses, which, of course, were really his own. That’s not supposed to be the way it works. Even though the board found nothing wrong with that practice, public pressure and an infuriated government forced Mr. Parkinson’s resignation late last week. What remains unexplained is how the board, comprised of otherwise bright, business experienced people, ever permitted such widespread lack of financial controls in the first place. Why did the board’s chair or its directors never thought it odd that the utility’s $1.6 million a year CEO was not submitting any expense accounts for their approval is part of the bizarre picture at Hydro One? And why, when the irregularities in the CEOs expense reporting and authorization were revealed, did the board not see that as a serious lapse and instead continued to express full confidence in his leadership.
This is the third CEO in a decade to vanish under a cloud –the second to be caught up in a controversy involving lavish pay and perks. And just as before, the board seemed oblivious to what was going on.
Over the course of many years beginning in the 1980s, I had a practice of writing to the new CEO and board chairs at Ontario Hydro, as it was then, to urge them to review what I saw as a growing culture of arrogance and lack of accountability. Most did not bother to respond; those who did pronounced themselves quite satisfied with the status quo. Almost every one of them was later caught up in a jumble of financial horrors and ethical shortcomings. One fellow resigned after just after a few months on the job. He apparently faxed in his resignation while on vacation in Hawaii because he couldn’t take it any longer. He, too, became the centre of controversy over what many perceived as an overly inflated pay package. The crisis came in the mid-1990s, when multi-billion dollar cost overruns, breakdowns in nuclear safety and the bizarre discovery of something the then board chair dubbed a “special nuclear cult” at Ontario Hydro led to radical transformations and the eventual breakup of the huge utility. Hydro One is the electrical delivery mechanism side of the old Ontario Hydro. Failures in accountability and corporate governance shortcomings were prominent among the reasons for that disaster. They remain a problem today.
Much of the blame for the recent scandal, I believe, still must be placed at the feet of the board. It has overall accountability for the utility’s performance and public reputation. Yet even with their knowledge of the history of turmoil at this utility, its directors appeared out of touch with their stakeholders and ill-informed about what is actually happening around them. Rather than instilling a culture of board empowerment, current and past directors seem to have created something of a culture of over-deference to management. As The Centre for Corporate & Public Governance reveals in its statement, in 2005 Hydro One’s audit committee met only four times, while its compensation counterpart met a total of seven.
And while these directors might look good on paper, you have to wonder what actually goes on in their meetings. Do they challenge and test management? Do they ask discerning questions? Are they well prepared? Do they probe their auditors and urge them to dig into things? The Centre makes some recommendations to Ontario’s Minister of Energy that might help to get to the bottom of these questions. He needs to act soon or further problems will arise.
The Amityville horror was, after all, only about a house. It’s not such a good idea for Canada’s largest electrical utility to be the scene of such constantly inexplicable strangeness.