The Board of Directors of Colorado Springs Utilities, also known as City Council, is considering changing the composition of the CSU Board.
So far, much of the public discourse has explored alternative board structures — all elected, all appointed or a combination of the two. While this is a worthwhile discussion, it is important boards be structured to achieve the best in corporate — or more specifically public utility — governance. What constitutes good corporate governance? Once these questions are answered, then we should design a structure to best achieve the desired outcome.
First and foremost, governance is not management. The governors hold senior executives accountable to good management in accordance with the direction and values established through governance. According to Investopedia: “Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company.” In the world of publicly traded stock, the dominant interest is the shareholder who seeks to maximize value of their investment.
In competitive markets, customers are assumed to be the ultimate stakeholders since their degree of satisfaction directly leads to sales and repeat sales. In the world of utilities, there is a problem due to a legitimate lack of competition. As a result, government oversees utility monopolies to make sure management does not extract excessive profit from customers.
With community-owned utilities like CSU, the community and many of the customers are the owners. Unlike private, for-profit entities that seek the highest returns possible, CSU seeks to maximize community value through low utility rates, very high reliability of service and long-term planning to maintain future reliability through resource sustainability to accommodate growth and capital replacement.
Based on the current board structure, residents of Colorado Springs are the only stakeholders electing CSU board representatives. They do so at the same time they elect their City Council members. Based upon a recent survey, most voters do not know they are simultaneously electing Utilities Board members during council elections. What about major utility customers or communities outside Colorado Springs whose long-term success is also dependent upon CSU?
Good corporate governance practices include the following:
1) integrity with ethical approaches;
2) boards and management effectively making their separate decisions and respecting boundaries;
3) significant stakeholder representation with appropriately balanced organizational objectives;
4) accountability and transparency to all stakeholders, including the capital markets;
5) independent board members with a balance of needed skills and experience given the organization being governed; and
6) management and board oversight to effectively identify and control the myriad of modern risks facing organizations.
The above aspects of good governance should be formally considered as the CSU Board/City Council plots a path forward.
Generally, there are four common flaws hindering good governance:
1) boards being hand-selected by management in order to sustain the status quo;
2) boards and management not respecting the boundaries between management and governance;
3) boards with little experience in an industry lack informational and expert power and thus succumb to executives who know more; and
4) key stakeholders not having direct representation on the board to better ensure balance.
By virtue of the Utilities Board being elected, the first flaw exists only to the extent CSU employees band together and influence municipal election outcomes. The second flaw was common in the early 1990s, but I think many of the issues were rectified in the mid-1990s with the creation of the Utilities Policy Advisory Committee, the adoption of a formal governance model and council agreeing to meet as the CSU Board separately from city council meetings.
The biggest shortcomings today center on the third and fourth flaws. Councilors — no matter how well intentioned and hardworking — seldom possess the needed expertise. Furthermore, learning the business of utilities is divided with learning the political and procedural ropes of city council governance. Also, councilors leave the board after four or eight years. Finally, some key stakeholders may be underrepresented. Such stakeholders include groups that are also the utilities’ largest customers — the business community, El Paso County and employees of CSU.
Hopefully, city council will improve CSU governance by proposing a new structure for citizens and customers to vote on next year. That way we can get more focused and skilled governance at both city council and CSU.
Tom Binnings is a senior partner at Summit Economics, a local consulting firm. He served as the first chairman of the Utility Policy Advisory Committee in the mid-1990s and has advised CSU management and the board on numerous issues since 1991. He can be reached at email@example.com.