RICHMOND, Va. — An extraordinary corporate civil war was under way, the Chicago Tribune reported.
The chief executive of the Virginia Electric & Power utility was locked in a battle in 1994 with Thomas Capps, CEO of his parent company, Dominion Resources Inc. Some Dominion board members were backing the utility chief, putting Capps’ job on the line.
So Capps turned to a friend and fellow Dominion board member, John Snow.
Snow, chairman and chief executive of rail giant CSX Corp., worked to repel the threat and, in response, helped engineer an effort to try to replace Virginia Power’s chief executive and remove three utility directors who supported him.
But there was one hitch: Snow’s moves openly challenged an order from Virginia regulators that forbade Dominion from firing utility executives. The order established a governance “wall” to keep Virginia Power’s day-to-day affairs separate from those of Dominion. But Snow also resisted the regulators’ authority to intervene in the bitter Dominion-Virginia Power dispute.
Less than a year later, Dominion and Virginia Power declared a truce, with Dominion agreeing that only Virginia Power’s directors would be responsible for hiring executives and overseeing company operations. As part of that deal, two directors–one of them Snow–resigned from each firm’s board. Regulators acknowledged that Snow, who played a key role in adding close colleagues onto Dominion’s board to assist Capps, didn’t necessarily do anything improper.
Still, Snow’s manueverings from several years ago take on a deeper significance because of his nomination this month to become U.S. treasury secretary. President Bush has hailed Snow’s “deep, longstanding commitment to ethical corporate governance.” Richard Cavanagh, president of the Conference Board, which chose Snow to head a blue-ribbon panel studying corporate governance reforms, called him “a leading light in the reform of corporate governance and business ethics.”
With investors reeling from scandals involving corporate America, Snow’s reputation is seen as helping bolster the administration’s credentials after the resignations of Harvey Pitt as chairman of the Securities and Exchange Commission and former CIA chief William Webster as head of a new accounting oversight body.
Still, Snow’s actions at Dominion, his record at CSX and his service on other corporate boards are likely to be examined closely as part of the Senate confirmation process, expected to start after the holidays. A spokeswoman for Republicans on the Senate Finance Committee, which will conduct the hearings, said Snow’s corporate governance record and any potential areas of conflicts of interest will be examined.
Although standards of good governance have evolved during Snow’s long business career, congressional sources said events of the past may take on significance in light of the current climate.
“We’ll have to consider everything in total,” said Jill Gerber, a spokeswoman for Republicans on the committee.
Snow and Capps, who remains chairman and CEO of Dominion, declined to be interviewed for this report.
Dominion issued a statement that said, in part: “Mr. Capps and Mr. Snow have known each other, personally and professionally, for more than a decade. Mr. Capps holds Mr. Snow in the highest professional and personal regard.”
Since Snow’s nomination Dec. 9, questions already have been raised about his service on other corporate boards, his compensation and recent sales of CSX stock before a sharp price decline. No one has alleged that he did anything illegal, and CSX officials said the sales were planned well in advance.
While CSX shares trade for almost $17 less than they did at the end of 1995, Snow has been paid more than $30 million in cash compensation over the past decade, according to regulatory filings, and had a $24 million loan forgiven by the CSX board in 2000. Such loans were banned this year by the Sarbanes-Oxley corporate reform law.
The stock transaction this summer also has raised questions: Snow sold 120,000 CSX shares at $35.22 each on Aug. 8, for $4.2 million. CSX Vice President Rob Shinn noted that Snow first proposed the sales in April and later filed to sell 380,000 shares if the stock reached various strike prices. But only the bottom tier was achieved.
Less than a month later, on Sept. 4, the company said weak coal traffic would hurt third-quarter earnings. Shares fell 16 percent in a day, and later sank to to just above $25 a share before recovering slightly.
“The timing was unfortunate from a perception standpoint, not from the standpoint that anything inappropriate transpired,” Shinn said.
Each year from 1994-97, Snow sat on outside boards with at least two other CSX board members. He has served on four outside corporate boards this year, which provides direct connections to dozens of other board members around the country. In the past decade, according to CSX regulatory filings, he has almost always sat on four or more outside boards.
Such service “is really quite extraordinary and quite extensive for a sitting CEO,” said Ann Yerger, a corporate governance expert and research director for the Council of Institutional Investors, a Washington-based non-profit group that represents large shareholders.
Governance experts say such links can increase the chances of conflicts of interest, particularly when two CEOs sit on each other’s boards, as Snow and NationsBank CEO Hugh McColl did for several years. During that time, CSX had a $100 million credit line with NationsBank and did other business with it.
CSX has eliminated most of such links over the years, with one notable exception–Robert Burrus Jr. of McGuireWoods LLP, one of the nation’s oldest law firms. Every year since he joined the board in 1993, the CSX proxy filing disclosed that the firm “regularly provides legal services to the Company and its subsidiaries,” which sources said represents 2 percent or less of the law firm’s revenue. During the Virginia Power-Dominion battle, Burrus was brought in to serve as outside counsel to a powerful Dominion board committee Snow chaired.
Time is the real issue underlying board interconnections, said Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in Georgia. He estimates that serving on just one outside board consumes the equivalent of roughly three weeks’ full-time work each year. As a result, CEOs have difficulty justifying being away from their main duties by serving on any more than two outside boards–the limit recommended in 2001 by a blue-ribbon commission of the National Association of Corporate Directors.
Overall, Shinn said, CSX’s corporate governance has improved, and the board would disagree with critics of Snow’s track record: “I think they’re extremely happy with his performance on corporate governance.”
When Snow joined the Dominion Resources board in 1993, he was familiar with its operations. CSX had hauled coal for Virginia Power’s plants for years. Dominion and CSX were practically neighbors in Richmond. Snow and Capps also were directors of Bassett Furniture Industries Inc. And that same year, Capps joined Snow on the board of NationsBank, now Bank of America.
But the relationship between Capps and Snow would end up testing the governance wall set in 1986 by the Virginia State Corporation Commission.
Capps became chief executive of Dominion in 1990, but his style quickly alienated many of the utility’s executives. Then, in 1993, the simmering discontent erupted into all-out conflict when a Capps ally wanted to reorganize Virginia Power’s legal department.
As the relationship worsened, it split Dominion’s board. And when it came out into the open, it attracted the attention of state regulators.
Their subsequent investigation generated hundreds of pages of documents–including filings from the companies, memos, board meeting minutes and directors’ handwritten notes–that provide a revealing behind-the-scenes look at the actions of a board in crisis.
By April 1994, according to filings with regulators, allies of Virgina Power CEO James Rhodes determined that Rhodes and Capps no longer could work together. Although accounts differ, it’s clear they wanted to keep Rhodes, and Capps was pushed toward early retirement.
That’s when Capps turned to Snow for help.
Snow, chairman of a holding company himself, was sympathetic to his friend’s plight. He helped to work out a plan for Capps to retire at the end of 1995, ending the immediate crisis. And in a more critical move, Snow was installed in May as chairman of Dominion’s important organizational and compensation committee.
His first order of business: hiring a search firm to make recommendations on replacements for both Capps and Rhodes, even though responsibility for hiring and firing utility executives “belongs to utility directors,” according to the regulators’ 1986 order.
“We can’t recruit a new DRI [Dominion] CEO without getting rid of Rhodes first. The issue is who is going to run this company,” say notes taken by the Dominion board secretary on Snow’s remarks at a committee meeting in late May. “Rhodes is a symbol of Power, suggesting that it’s the power company that runs things, instead of DRI and its board. Rhodes can be replaced.”
Snow’s committee also hired Burrus’ firm, McGuireWoods, as outside legal counsel. Burrus himself attended the committee meeting, the notes said.
Committee member and former parent company CEO Justin Moore, who backed Rhodes, objected. He argued that the committee needed “legal counsel on governance questions from a clearly neutral attorney,” the notes said.
Leading corporate governance expert Ric Marshall, CEO of the Corporate Library research group, while not commenting specifically on the Snow-Burrus link, said, “The available pool of good directors, of consultants, of attorneys to represent the company … is so large that there is no legitimate reason to bring in someone who has those sorts of close ties to the situation, who has a potential conflict.”
CSX’s Shinn, however, said Richmond has only two top-tier law firms that handle corporate governance. Virginia Power already had retained one. So, he said, it was “fairly obvious” for Dominion to retain McGuire Woods. Burrus, for his part, said he didn’t recall if Snow initiated the contact. But he said such work doesn’t compromise his independent oversight of Snow as a CSX director, and said Snow initiated many of the steps to reduce ties between CSX and its directors over the years.
Shinn also noted that Snow’s views on Rhodes reflected Dominion’s belief that its shareholder rights were paramount, and that the two may not have been able to work together, given the extraordinary civil war.
“He was certainly supportive of the Dominion position,” Shinn said. “At the time, it was more a question of how can the subsidiary executive work in concert to oust the parent chairman?”
Shortly after that committee meeting, on June 1, Snow wrote a memo to both the Dominion and Virginia Power boards, saying the search firm would make recommendations to the Dominion board on a new Virginia Power CEO, and Dominion’s board would make “appropriate recommendations” to the utility board.
On June 13, members of the two firms’ organization and compensation committees met. Virginia Power directors, according to a report prepared by independent consultants hired by the state commission, proposed that Capps retire at year-end and that the Dominion directors agree not to remove any utility executives.
The next day, the report said, Snow responded with a different idea: Dominion would have unlimited power to change Virginia Power’s board, and both boards would adopt resolutions declaring the state commission “has no jurisdiction … to dictate to Dominion Resources how it shall exercise its stockholder rights with respect to the Power Company.”
Snow also sent a letter that day to William Berry, another former parent company CEO supporting Rhodes. In it, he warned, “While recognizing the interests of the [State Corporation Commission], we need to carefully guard against unwarranted intrusion into the internal affairs of both companies and the relationship between them.”
Days later, the crisis escalated.
At a late-night meeting, Capps’ allies on the Dominion board replaced an ailing director with a newcomer. That new member then provided a crucial vote that expanded the board with three more new members and established Capps’ control.
Two of the new directors had CSX ties–Richard Leatherwood, former CEO of its equipment subsidiary, and Dr. Frank Royal, a private physician and CSX board member. The others were CEOs acquainted with Snow: He already sat on the board of a third new member, from Bassett Furniture. And before long, Snow joined the board of the fourth, from Richmond-based Circuit City Stores Inc.
All four directors were later added to the Virginia Power board, which already had some overlap with the Dominion board.
After the controversial Dominion board meeting, the State Corporation Commission, citing concerns raised by Snow’s June 1 memo, launched an investigation into whether Dominion had violated its 1986 order.
“DRI does not have the authority or responsibility to direct Virginia Power in the performance of its public duties,” commissioners insisted.
Dominion responded by saying the dispute wasn’t about Virginia Power–it was about the group of Rhodes supporters trying to gain control of Dominion’s board. Dominion wasn’t a regulated utility, and the company argued its rights as Virginia Power’s shareholder were supreme.
Consequently, “There is no need–and no legal basis–for the commission’s intervention,” a statement from Capps read.
On July 26, members of a special Dominion committee, including Snow, voted to oust three Rhodes supporters from the utility’s board. The Rhodes supporters engaged in “activities contrary to the best interests of Virginia Power and its sole common shareholder, DRI,” Dominion said.
The committee also voted to amend Virginia Power’s bylaws, so that the board couldn’t remove Capps as the utility’s chairman without his consent.
Virginia Power fired back.
A utility attorney called the moves a “blatant and direct challenge,” violating the commission’s 1986 separation order.
Nonsense, Dominion responded. Virginia Power’s board, it said, believes it is “answerable to no one but itself.”
In August, two shareholder suits were filed, alleging that Dominion and Capps failed to disclose material facts about the dispute. Shareholders also brought letters to Dominion, demanding that the company sue Capps and several unidentified directors for breach of fiduciary duties because, the letters alleged, they had violated the regulators’ 1986 order.
Within two weeks, a deal was struck. Boards were shuffled, reporting relationships were changed, a joint committee was established to monitor the relationship of Capps and Rhodes, and the companies agreed to work together to defend against shareholder suits.
The vote to oust the three utility board members–which hadn’t yet taken effect–was rescinded; Dominion acknowledged they “were removed from the Virginia Power board without cause.”
But the strife continued, and soon, the Virginia legislature entered the fray, responding to Dominion’s challenge to the regulators’ intervention by moving forward with a bill to reaffirm commissioners’ jurisdiction over disputes involving holding companies.
Shortly after the measure overwhelmingly passed the House, the companies reached a settlement in February 1995: Both CEOs would leave by July 31, 1996. Two people stepped down from the utility’s board, and two–including Snow–from Dominion’s.
Dominion, for its part, agreed that only Virginia Power directors would be responsible for hiring and managing utility executives, and would remain solely responsible for utility oversight.
At least publicly, the companies began to get along. Neither CEO left as scheduled: Rhodes didn’t retire until mid-1997, and Capps remains Dominion chairman and CEO.
Virginia, like many states, is deregulating its utilities. The utility’s CEO is a former McGuireWoods partner who worked on the Dominion matter and sharply criticized the Rhodes supporters. The dispute seems largely a thing of the past in Richmond. But, for Snow, the question now becomes whether it is in Washington.