PG&E Shakes Up Governance: Can It Restore Investor Confidence?

In the U.S., when a company has a role in an accident causing over $50,000 in damages, hospitalization or death, it must report that event at both the federal and state levels. Utility company Pacific Gas & Electric (PG&E) reported more such accidents from 2004 to 2010 than any other U.S. firm and was cited for 411 safety violations over the same period. The company responded by placing responsibility on outside factors, such as vehicles hitting pipelines. However, investigations into its extensive history of safety violations indicate that external circumstances played a limited role in these accidents. Also left unanswered was the question of why PG&E’s upper management seemed unable to respond to recurring issues and make appropriate remedies. 

Now, after filing for Chapter 11 bankruptcy in January and seeing its stock lose 52 percent of its value on the day of that announcement, PG&E faces a major crisis of confidence with the investment community as well as with its customers. The poor history of accidents on the utility’s record set the stage for the issue of inadequate corporate governance to become magnified many times over by lawsuits connected to the devastating California wildfires. (Prior to the bankruptcy filing, investors were already savvy to the governance problem: For two months prior to the bankruptcy announcement, they had been jumping on the selling boat.) 

Just how bad was that governance? The California Public Utilities Commission (PUC) investigated the company and found that PG&E lacked the staffing capabilities to label its natural gas pipelines. Under pressure to comply with laws on timeliness, supervisors at the company were accused of falsifying records between 2012 and 2017. They did so, according to the Commision, to avoid late ticket penalties, but at the cost of compromising confidence in the company. According to the Commission’s report published in 2018, it was “common knowledge” at PG&E that this was occurring. A manager at the company told the Commission that part of his job performance evaluation was based on his ability to produce zero late tickets. The widespread nature of these alleged falsifications could largely be accounted for by this ill-advised evaluation method. 

Preventing this poor management from happening again requires a total shift in PG&E’s corporate culture and values, and the company is now making attempts to move in the right direction by replacing 10 members of its board of directors. These new members will have the task of aligning the company’s values toward safety and long-term profitability rather than short-term solutions. Doing so will require the new board to hire managers and chief officers that commit to maximizing value for all stakeholders, including customers, employees and shareholders. This is especially important for utility companies that face the challenges of operating in the wake of an increasing number of catastrophic environmental events, such as the California wildfires. 

A new CEO could guide the company to a re-set in this direction. Currently, PG&E is led by interim CEO John R. Simon. Geisha Williams, the company’s most recent CEO, abruptly resigned in January, around the same time that the company declared bankruptcy.

Initial reponse by the investment community has been positive. Shares have stabilized over the course of the past month, appreciating 91 percent between January 14 and January 15. The company’s market capitalization is a long way short of its value before bankruptcy fears started, but this upward trend provides some promise for the company’s future. Investors seem hopeful that PG&E has the potential to turn itself around, but this will ultimately be decided by a new CEO’s ability to redefine the company culture and implement better business practices. 

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