OPG directors had talent, sadly the wrong kind
By JANET McFARLAND
Wednesday, December 17, 2003 - Page B2
Ontario Power Generation's blue-chip directors could have been voted "least likely to screw up" by a committee of their peers. And yet, somehow, they did. It's enough to worry any shareholder who tries to predict the quality of a company's governance by looking at the track record of those around the table.
The recently departed board of the Ontario electricity utility was undeniably prominent, especially for a Crown corporation. Chief executive officer Ron Osborne, for example, was recruited with fanfare in 1998, leaving his previous job as CEO of Bell Canada. Chairman Bill Farlinger was a former chairman of accounting firm Ernst & Young.
Other directors included Arthur Sawchuk, the retired CEO of DuPont Canada and the current chairman of Manulife Financial; Richard Thomson, the retired chairman of Toronto-Dominion Bank; Paul Godfrey, CEO of the Toronto Blue Jays; and Jacques Ménard, chairman of BMO Nesbitt Burns, who joined the board in 2002.
Despite their impressive résumés, however, the 10-member board proved unable to prevent a debacle from unfolding at OPG.
A damning report released this month by former federal energy minister Jake Epp said OPG grossly mismanaged a project to refurbish the Pickering A nuclear plant. The original 1999 cost estimate of $1.1-billion has skyrocketed, and the latest incomplete estimate is now $3-billion to $4-billion. From 1999 onward, the board approved 11 cost overruns and 13 delays in the completion date.
Mr. Epp's report says the blame for the mess must be shared by the board, management and the Ontario government, saying "failure was pervasive" at all three levels. Mr. Osborne, Mr. Farlinger and another top executive resigned when the report was released. The entire board resigned soon after.
One obvious problem at OPG was that Mr. Osborne, who has taken full responsibility for the disaster, had no experience running an electricity utility, not to mention a nuclear power plant. He was hired in 1998, when the Ontario government was preoccupied with its plan to split the former Ontario Hydro into five separate companies, including OPG. This was intended to enable the privatization of OPG as a new public company. The result was that the government was focused on recruiting a CEO who could launch a new public company, but ignored the fact that he lacked experience with the nuclear problems he also confronted.
And, as it turned out, OPG also had the wrong board for the job it confronted -- although this has arguably been a chronic problem for the old Ontario Hydro.
Most of the utility's recent directors were recruited in the 1990s to help privatize OPG, with several bringing solid financing experience to the IPO, which never occurred. None had nuclear expertise. This raised the odds they would be miss early mistakes occurring in the Pickering project.
This gap in the board's skills cannot be easily forgiven. The crisis in the nuclear division was clearly outlined in a 1997 report that led to the resignation of the previous CEO and the shutdown of the Pickering A reactors. Given the serious problems, it should have been obvious that the board needed to be bolstered with expertise in this area.
The result, Mr. Epp's report said, was that, from the outset, OPG failed to recognize the scope and complexity of the project it was launching. He said project management was "seriously flawed." Well-established industry practices for a project of such size and complexity were not followed. The report listed essential elements of cost reporting typical with construction projects, and said OPG was below the norm with each. Because there were inadequate cost and progress reporting systems, projections were "consistently unreliable."
In a new book on governance, Harvard Business School professor and corporate director Jay Lorsch said boards need to provide different sorts of oversight at different times, depending on the challenges a company is facing. Boards range along a spectrum from distant watchdogs to active pilots, but many fail to consciously assess the kind of oversight a company needs at any given time, Prof. Lorsch argues in his book, Back to the Drawing Board.
It's now clear that OPG needed not only greater scrutiny by its CEO, but also a more probing style of board oversight. We now know that it particularly needed a board that would insist on painstaking scrutiny of the renovation strategy.
Mr. Epp's report contains recommendations for OPG's corporate governance, saying future work on the refurbishment should have "enhanced independent oversight" of project management decisions. The report said that the board and management should agree on key progress indicators, then track them in detail at each meeting. The report also said the government should review OPG's board composition to ensure there is adequate expertise in utility operations.
Those ideas come too late to save Ontario taxpayers from a huge new expense, and may even be too late to help the utility's new three-member board. The board will meet legal requirements, but will have little real power because the Ontario government said it will take direct control of all oversight.
It's not too late, however, for the Ontario government to learn for the future. One key lesson: Even directors with solid track records can be wasted -- even fail miserably -- if they bring the wrong kind of skills and the wrong sort of oversight at a critical time in a company's history.
