In the latest installment of the Salzburg Questions for Corporate Governance, non-executive director of World Medical Relief considers whether the latest Texas power crisis could have been avoided with more local control
This article is part of the Salzburg Questions for Corporate Governance series by the Salzburg Global Corporate Governance Forum
Lyle Lovett’s album “The Road to Ensenada” has been a favorite of mine ever since it was released in 1996. The chorus of one song that was eventually used in tourism advertisements goes: “That’s right, you’re not from Texas, but Texas wants you anyway.”
Unless you are on the board of the state’s electric grid operator, apparently.
This February, Texas experienced a power crisis after several winter storms pounded the state. A massive outage left more than 4.5 million homes and businesses in the dark, causing shortages of water, food, and heat. To add insult to injury, some customers who had signed up for market electricity rates came home to discover $5,000 utility bills driven by price spikes as generating stations went offline.
A report written by the US government after a similar Texas outage incident in 2011 resurfaced and made headlines after it was reported that recommendations to prevent a recurrence were never implemented. Not surprisingly, there was public outrage and political leaders began calling for investigations. The Electric Reliability Council of Texas (ERCOT), a 501(c)(4) non-profit entity that operates 90% of the state’s electric grid, came under a magnifying glass with respect to its corporate governance practices.
Critics pointed out that five of ERCOT’s 15 directors resided outside of Texas, including the board’s chair and vice chair. Members of the State Legislature, one of two bodies that oversees ERCOT, voiced their surprise and disapproval of this arrangement and began calling for resignations.
One representative said he was “totally shocked” to learn that a third of ERCOT’s directors lived outside Texas, and that he had begun drafting legislation to prohibit non-Texans from serving on the ERCOT Board. Shortly thereafter, all five out-of-state directors resigned en masse, writing that their decision was made to “allow state leaders a free hand with future direction and to eliminate distractions.” The chairwoman had been on the board and in her role for just five days prior to the outages.
This raises interesting questions. Is it appropriate to require ERCOT’s directors to reside in Texas? And more generally, when (if ever) is a stakeholder or residency requirement for an organization’s directors appropriate as a matter of corporate governance?
ERCOT is one of nine Independent System Operators (ISOs) in North America, all of which serve a de-facto regulatory function in ensuring reliable and affordable power supply. ERCOT’s bylaws are similar to those of many for-profit corporations in that they specify a nominating committee that is responsible for identifying qualified board candidates. While the bylaws indicate a preference that unaffiliated directors reside in Texas, there is no requirement.
Peer organizations also do not impose a residency requirement. For example, the Mid-Continent Independent System Operator (MISO) has a board of nine directors, six of whom reside outside the geographic footprint of MISO’s service area.
The conventional wisdom in corporate governance, especially in the case of for-profit corporations, is that an organization benefits from diverse directors who have seen what has (and has not) worked well in other industries and geographic areas. Although the ISOs are non-profit entities with a social welfare-driven mission, their nominating committees seem to have embraced this same approach with a decades-long history of identifying non-resident candidates for their boards. However, at least in the case of Texas, this approach is now being questioned.
A touchstone question is whether implementing a residency requirement for ERCOT’s board members would strengthen (or weaken) the organization’s capability to fulfill its purpose of ensuring reliable and affordable power supply in the state of Texas going forward. More broadly, should other entities with a role in regulation implement a stakeholder requirement?
What lessons (if any) can for-profit corporations learn from this discussion? For example, should an investor-owned utility with a defined geographic service territory require most or all of its directors to reside there? How would shareholders and stakeholders such as groups of customers be helped or harmed?
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Tom Komjathy is non-executive director of World Medical Relief, Inc., and chairman of its Governance and Board Development Committee. He is also director of operations for Warner Norcross & Judd, LLP, a Michigan law firm. Prior to joining Warner, Tom held operations, strategy, and general management positions in the energy and chemicals industries. Tom is a member of the National Association of Corporate Directors. He earned both an M.B.A. and bachelor of science in chemical engineering from the University of Michigan. He is a fellow of Salzburg Global Seminar.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter
