CEO Gaffe of the Week: Duke Energy

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This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!

This week, I plan to highlight the current CEO of Duke Energy (NYSE: DUK  ) , Jim Rogers, and the former CEO of Progress Energy and Duke Energy, Bill Johnson.

The dunce cap
Normally, I have nothing but praise for Duke Energy CEO Jim Rogers. He was on my list of top 10 Best CEOs of 2011, and he's done a remarkable job in transforming Duke from a heavy coal user into a top-tier renewable energy producer. Duke ranks behind only NextEra Energy (NYSE: NEE  ) and ahead of rival Exelon (NYSE: EXC  ) , previously the largest aggregate power producer in the United States, in terms of renewable energy production.

However, the merger between Duke Energy and Progress Energy last week went from being a nuisance to an absolute train wreck.

Not to be too cliche, but seriously, where to begin?

After announcing an agreement to merge in January 2011, Duke and Progress cleared their last regulatory hurdle in late June and finalized their merger earlier this month. Contingent on the merger, Bill Johnson, then CEO of Progress Energy, would step in to lead the combined company in order to provide stability to Progress' workers jobs in the Raleigh, N.C., area and ensure that Progress received ample say on the board of the new company.

What actually transpired was nothing short of a made-for-TV moment whereby Bill Johnson resigned just hours after becoming CEO of Duke, and walked away with a compensation, bonus, and severance package that added up to $44 million. My initial reaction, and that of my Fool colleague Alyce Lomax, was nothing short of disbelief. However, there's more to this story than meets the eye.

To the corner... everybody!
Oh yeah -- there's more!

Shortly after Bill Johnson's resignation, not one, but two inquiries were launched into the details surrounding Johnson's departure. The first inquiry comes from the North Carolina Utilities Commission and the second from the state's attorney general.

The N.C. Utilities Commission held hearings earlier this week with Duke Energy's CEO Jim Rogers to get his version of the story.

According to Rogers, the board had moved to push Bill Johnson out because of his "autocratic" management style. Citing concerns over the ability of Duke Energy board members to speak their minds, and Progress' supposed mismanagement of its idled Crystal River nuclear power plant in Florida, Duke's board voted 10-5 (not surprisingly, there were 10 Duke board members and five from Progress) to remove Mr. Johnson once the deal was complete. Three additional Progress Energy execs resigned from the board not long after Mr. Johnson announced his resignation.

With the recent exodus of Progress' management team, regulators are concerned that Duke Energy may have falsified information or fudged its statements in order to facilitate its merger with Progress. Questions are also swirling regarding why Duke never alerted its shareholders of the matter. Even worse, the fate of hundreds of Progress workers in Raleigh now rests in the hands of what appears to be an unforgiving board of directors loaded with Duke Energy members. One way of achieving cost synergies in this merger is through layoffs; and it was expected that Bill Johnson would protect many of Progress workers' jobs. That doesn't seem as likely now.

The second investigation was launched by North Carolina Attorney General Roy Cooper, who is interested in finding out as well if misrepresentations were made to gain the approval of the N.C. Utilities Commission. Cooper is also investigating whether Duke executives fudged the truth when it won a 7% energy rate increase from the Utilities Commission in 2011.

This is an absolute character-demoralizing disaster for both companies, and we're not anywhere near a conclusion to this made-for-TV drama. I'll be sure to revisit this story after Bill Johnson testifies, and maybe, just maybe, we'll get to the bottom of this fiasco. In the meantime, cue the music from Days of Our Lives...

Do you have a CEO whom you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.

If you'd like a surefire way to avoid investing in companies with questionable leadership practices, I invite you to download a copy of our latest special report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." This report contains a wide array of companies and sectors that are likely to keep your best interests in mind, regardless of whether the market is up or down. Best of all, it's completely free for a limited time, so don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is merciless when it comes to poking fun at dubious CEO antics. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of, and creating a covered straddle position in, Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never wears a dunce cap.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2012, at 1:30 PM, Patapsco1 wrote:

    Imagine my surprise when I found rather than 150 shares of Duke I only had 50 shares. When I looked at myTtransaction History it listed the 1 for 3 split as "Mandatory."

    Why the heck did I know nothing about addition instead of making profits I lost money!!!

    When I did my research and found this whole merger to be unethical.

    I sold all 50 shares of DUK this week. North Carolina approves future rate hikes by DUK. And if they're as mad as I won't paint a pretty picture for Duke's future.

    Thank you for bringing this public. Ha, I needed an outlet for my dismay and disdain.

    Cris Meyer

  • Report this Comment On July 16, 2012, at 5:11 PM, DukeComment wrote:

    Hi Cris:

    Just for the record, investors do not lose money due to reverse stock splits.

    A stock split is a transaction in which a publicly traded company decides to increase or decrease the amount of a company’s outstanding shares by a chosen ratio. A stock split is a transaction in which a publicly traded company decides to increase or decrease the amount of a company’s outstanding shares by a chosen ratio.

    There are two kinds of stock splits: traditional and reverse. In a traditional stock split, a company increases the number of outstanding shares by a certain ratio such as 2:1, 3:1, or 10:1.

    In other words, you get more shares than you originally held. You might think, “Great! I have more shares. Call thetravel agent; we’re going to Hawaii!”

    Not so fast. In fact, your stock price and your dividend have decreased by the same multiple that your shares increased. In a 2:1 stock split, if you held one share worth $40, now you own two

    shares worth $20 each, so the total value of your investment has not changed.

    In a reverse stock split, a company reduces the number of its outstanding shares. For example, if you hold three shares at the time of a 1:3 reverse stock split, you will hold only one after the transaction is completed.

    Just like the traditional stock split, a reverse split should not change the total value of your investment.

    If you held three shares worth $20 each, right after a 1:3 reverse split is executed, your one share should be worth $60.

    Still not convinced or unclear? For an independent take on Duke Energy's reverse stock split, check out this June 17 article from the Charlotte Observer:

    Does Duke-Progress reverse stock split mean its time to sell?

    - Communications Manager, Duke Energy

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