Cronies Destroying Wealth

Companies in industries such as utilities or extracting natural resources serve two masters, customers and regulators. It is a relationship where crony favors are sure to develop. Duke Energy's February coal ash spill into North Carolina's Dan river highlighted the worst in crony capitalism. That Governor Pat McCrory is a former employee who made it his business to defang the EPA to reduce the regulatory burden to the utility at the expense of the State's natural resources and it's citizens safety will be politically damaging to the G.O.P.'s current control there. While the the political ramifications of this accident are left to the good people of North Carolina, the investment community currently is voting with their wallets by selling and thereby distancing themselves from Duke Energy, a utility incompetent enough to put at risk billions of dollars of stockholder wealth through complacency brought on by political influence.

Cronyism is as addictive and unhealthy to a corporation's long term well being as alcohol is to certain individuals. Corporate self delusion takes hold when insiders deny their malfeasance by repeating the mantra that they serve the public. Soon the unthinking mantra blinds the company to it's operational risks. Illusory profits are declared and bonuses paid to management because of efficiencies garnered from reduced maintenance expenditures. Good investors see the sclerosis hardening and sell the stock. As stock values goes down so does the price earnings ratio in comparison to others in the industry. With a low PE raising money from the bond market is dearer and dividend payments to stockholders go at higher rates to maintain the stock price at a level the bond market requires. To my knowledge Duke Energy was not considered crony addicted beforehand and therefore many investors were surprised by this wealth destroying accident and it's apparent crony addled stupidity. Suddenly Duke Energy's reputation among it's peers as a good steward of stockholder assets is lost. This loss will be just as onerous a burden as the losses from private liability suits which are sure to come.

The biggest destroyer of stockholder wealth, Tokyo Electric Power better known as Tepco, put nuclear power plants lined up on the shore against the delusions that the1930's tsunami that devastated Fukushima would not repeat, that four plants next to each other were as safe as one and that the emergency generator's required for the almost certain disaster could be placed below water level. This absurd decision sequence could only have come from a captive regulatory apparatus that was countered, bargained and bullied on every detail by a company promising the regulators revolving door jobs. And the greatest delusion among all of those involved was that this was done for the betterment of stockholder value and Japan's economy. Unfortunately for Japan, TEPCO's wipeout leaves nothing to compensate the victims and the country for the company's malfeasance and it's regulators complacency.

The second biggest destroyer of stockholder wealth due to cozy relations with an inept government regulator and slackening operational standards is BP Oil. Fortunately for this country and the people living on the Gulf Coast the company had assets to cover the losses from the oil rig explosion and months long oil spill. If Congress has a lesson to learn here it is to rescind the crony deal whereby there is a 75 million dollar liability limit on LLC offshore oil rig operators. Otherwise the people of the Gulf Coast may be left with a future situation similar to the sloppy Charleston, West Virginia chemical tank operators who after letting thousands of gallons of toxic chemicals leak into the Elk river cut and ran from their liabilities leaving the mess to the tax payers.

While many would believe that another law with bigger fines and more regulators is required to resolve the problem of industrial accidents, the greatest deterrent is skin in the game. Thankfully BP had the assets to fix the problem and compensate the victims, actually more than compensate according to their recent ad's bemoaning payment's to Louisiana strip clubs and the like. Duke Energy has assets to fix and compensate as well. If the West Virginia Chemical Tank company had liability coverage sufficient to cover the hundreds of thousands of people affected by their sloppy operations then possibly insurance carriers would have made it their business to make sure the company ran a tight ship. Reliance on government agencies subject to politics and ignored by those being regulated is no compensation to the victims and taxpayers. Assets and Insurance are.