EMC’s CEO deserves the ax

The legal settlement between Cobb EMC and its for-profit affiliate, Cobb Energy, mercifully ends the failed experiment that was Cobb Energy. The Marietta-based electric co-op created Cobb Energy in 1997 to insulate Cobb EMC from hostile takeovers in the era of energy deregulation and, co-op leaders claimed, lower the co-op’s costs by spreading overhead to a subsidiary that would make money selling home security, wiring homes for satellite TV and trimming trees.

Thanks to the six co-op members who sued the two companies last year, members now know that this enterprise was an abject failure. Instead of lowering the co-op’s costs, Cobb Energy demanded bigger and bigger fees for operating it: the original 2 percent markup soon became 11 percent, without so much as a notice to co-op members.

Instead of making money, Cobb Energy’s non-electric subsidiaries mostly lost money. The co-op wasn’t gobbled up by another utility, but then no other co-op in the country was either, and none of those went to the extraordinary step of turning a nonprofit, member-owned cooperative into a sinecure for a for-profit enterprise.

The legal settlement announced last week will end the co-op’s 40-year operating contract with Cobb Energy — a savings of $170 million alone — and require Cobb Energy to return valuable assets, such as the members’ electric meters. It also will require Cobb Energy to sell off its failing businesses.

In return, co-op members will buy out Cobb Energy’s common and preferred stockholders; they will also assume Cobb Energy’s debt. All told, the deal will cost co-op members around $40 million.

But the settlement contains one enormous flaw: It holds no one accountable.

Dwight Brown, the architect of the failure, walks away scot-free. CEO Brown keeps his $300,000 salary at Cobb EMC. He gets nearly $500,000 in salary that Cobb Energy would have paid him if the arrangement had continued. Co-op members pay him $3 million for the 120,000 shares of preferred stock that board directors gave him in 2002 (without telling members). And Brown keeps his job until February 2011, when his contract expires.

The United States became the nation’s premier economy because it fostered the simple notion that risk is rewarded when a business succeeds and punished when it fails. It’s the central underpinning of American capitalism and a free society. Trillion-dollar bailouts and businesses that are seen to be “too big to fail” have put this principle to the test. But the world financial crisis reminds us that moral hazard, the notion that those who do not pay for their mistakes are encouraged to repeat them, undermines our economic strength as a nation.

Brown gambled away money and assets belonging to co-op members on an untested idea that lost money. The co-op’s assets and earnings were on the line, not Brown’s. Brown also learned how to minimize Cobb Energy’s losses for stockholders such as himself. His $3 million in preferred shares paid dividends of $265,500 a year, and Cobb Energy continued to pay them even when its non-electric businesses were losing money.

Cobb Energy’s only reliable revenue came from the fees paid by the co-op (and another business that serviced other co-ops), and Brown knew how to manage the books there. When Cobb Energy needed more revenue, Brown endorsed an increase to the management fee paid by Cobb EMC. Not once, but twice.

Bad decisions, even questionable ones, seldom survive long because companies, particularly those like Cobb EMC that are beholden to members, have to disclose them to stakeholders. Not so Cobb EMC. Brown presided over a climate of secrecy that concealed Cobb Energy’s losses — and hid the degree to which he and other insiders were using the co-op for their benefit.

Some weeks ago, an editorial on these pages called on Brown to resign for the good of the co-op. Brown declined, aided in great measure by a letter of support signed by all 10 of Cobb EMC’s directors. Now that his job is protected under the settlement terms, Brown’s fate rests with future directors of Cobb EMC. Seven will be up for election next year. Maybe Cobb EMC members will signal their own disgust at the board’s complicity lin Brown’s shenanigans.

It’s entirely possible that new directors, unbeholden to Brown, could terminate his employment contract and still have to pay Brown every penny that he would have earned. After all, Brown signed the agreement in 2002 with a board that appeared eager to grant his every wish. But even if he got every cent, terminating his contract would still send a message that he faced consequences for his failed leadership.

Americans have justifiably directed their anger over the economy at Wall Street titans who ran their companies into ruin — and walked away with million-dollar payouts. Unfortunately, Georgians don’t have to look that far for a similar outrage. Brown collects his paycheck in Marietta.

— Ken Foskett, for the editorial board (kfoskett@ajc.com).