The New York Times The New York Times Business August 24, 2003
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he Blackout of 2003



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FirstEnergy Corporation


Blackouts (Electrical)


Electric Light and Power


Executives and Management




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MARKET WATCH

FirstEnergy Shareholders Suffer a Power Failure

By GRETCHEN MORGENSON

THE FirstEnergy Corporation, the utility company whose power lines were the first to fail in the blackout, seems to have ignored regulators' warnings that its antiquated grid could falter.

The company, based in Akron, Ohio, has also ignored shareholder demands that its executives improve the company's governance practices . While greater attention to corporate governance may not have prevented FirstEnergy's woes, the company's persistent dismissal of shareholders' concerns about its entrenched board is a troubling sign of complacency at a company whose every move is under scrutiny.

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Seven times since 1999, a majority of shareholders voted for changes in corporate governance, and in each case FirstEnergy did not respond. This year, more than half of its voting shareholders favored rescinding the poison pill that prevents an unfriendly takeover at FirstEnergy and changing the company's staggered board structure.

FirstEnergy directors serve for three years; just one-third of the board is elected each year. A majority of shareholders have voted four times to put the company's directors to annual re-elections.

FirstEnergy said that its board structure is better because it increases the "likelihood of continuity and stability in the board's business strategies and policies." But many shareholders seem to think that too much board continuity has made it too chummy. Ten of FirstEnergy's 16 directors have been either on its board or one of its units for 10 years or more.

John Chevedden a shareholder advocate in Redondo Beach, Calif., says the company has also tried to keep shareholder proposals out of its proxy materials.

"Given their response, it is not surprising that they've had other oversight lapses," Mr. Chevedden said, referring to recent problems at the company's energy operations. "I think that when a company doesn't respond to shareholder votes, that's all the more reason to investigate it more thoroughly and demand more accountability and give greater scrutiny to what the company does."

The company's bylaws state that its board structure cannot be changed unless 80 percent of the shareholders vote to do so. None of the recent votes on the staggered board have met that hurdle. But given that 65 percent of those voting last May favored the proposal, the company could certainly be more responsive.

After the shareholder vote last May, the company did not say how it planned to respond, if at all. On Friday, Kristen Baird, a spokeswoman at FirstEnergy, said the recent shareholder votes on both the board structure and the poison pill were being examined by the directors.

Ms. Baird said the company is committed to good governance. She disputed the view that it battles shareholder proposals.

FirstEnergy is not alone in ignoring shareholders' proposals, even ones that win. Such proposals are nonbinding; many companies shrug them off.

But the Securities and Exchange Commission is weighing new rules that would give shareholders more power in the selection of directors. One idea is to identify events that will prompt enhanced shareholder access — like a company's refusal to act on shareholders' proposals that win majorities.

"I think this is a company that still has a chance to be responsive to its shareholder vote in its latest year, but the evidence from its past conduct is not very encouraging," said Gregory P. Taxin, at Glass, Lewis & Company, an independent research firm in San Francisco focusing on corporate integrity. "This is a board which has been in place for a long time with provisions that have entrenched it there. It is a great example of why we need the nomination reforms that the S.E.C. is considering." 




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