NEWS & TRENDS

BETTER GUIDELINES, LONGER HOURS
Korn/Ferry International's 29th annual "Board of Directors Study" shows that directors at Fortune 1000 companies are making long-term progress strengthening practices for better corporate governance. For instance,

• 71 percent of the boards have written guidelines on corporate governance, compared with 65 percent in 1995;
• 40 percent formally evaluate the entire board's performance on a regular basis, compared with 26 percent in 1995; and
• 62 percent have a formal committee that reviews corporate governance processes and board operations, compared with 41 percent in 1995.

But the survey also found that board practices are not yet keeping pace with the sentiments of directors regarding good governance practices. For example, directors may say that a "formal management succession process in place" is one of the three most important factors in determining good governance, but only 64 percent of boards have a management succession committee or process, and only 51 percent of directors say the board is effective in this area.

Moreover, while 72 percent of directors say that individual directors should be evaluated regularly regarding performance, only 21 percent of boards currently conduct such evaluations, and only 41 percent of directors on those boards think that the evaluations are effective.

Some other key findings:

• 79 percent of directors say the former CEO shouldn't sit on the board;
• 73 percent say the board should typically hold regular executive sessions without the CEO during board meetings (though only 42 percent of boards typically hold such sessions).
• Directors spend an increasing amount of time on board matters€€€€€€an average of 15.3 hours per month, or approximately 183 hours annually, compared with 156 hours annually in 2001.

The study findings are based on responses from 908 directors representing 209 Fortune 1000 boards.

WHAT WAS THE SUBJECT, AGAIN?
After Enron, a tumultuous year on Wall Street, and what everyone generally agrees is a collapse in investor confidence in the energy sector—and as deregulation takes hold in some states and is hotly debated in others, and last November's votes on municipalizations seemed to play large roles in still other states—one would think that energy issues are top-of-mind with the U.S. population.

In fact, according to Deloitte & Touche (now Braxton), Americans seem to be less aware of issues in the electric industry than at any time in the past six years. The company's recent national survey of about 800 consumers, conducted with International Consumer Research in September, reported that only 24.7 percent of respondents (compared to 39.7 percent in 2001) are aware of changes in the electric industry. This continues last year's decline in consumer awareness of industry changes.

But the good news is that fewer survey respondents this year (47.9 percent) than last (56.2 percent) expected that electric rates will increase rather than decrease due to deregulation and competition.

STEALING POWER $20.0 million—amount of money a medium-size utility can lose to power theft. $3.1 million—amount of money the average utility recovered from theft investigations in 2001. 30-40—number of employees a large utility may have working on theft investigations. 90—percent of money that is recovered by utilities from people caught stealing power. 96—percent of cases that get convicted if a utility prosecutes. Source: Edison Electric Institute and Electric Power Research Institute

Much of the seeming disinterest, in fact, has to do with Enron, in that some states have put the brakes on deregulation. "I would attribute this to the fact that few states have taken any significant action in the past 12 months that would stimulate consumer interest," said Gregory Aliff, managing partner of the Braxton Energy Resources Group.

WINDS ACROSS EUROPE
Europe's wind power hit a 40-percent growth rate over the last 12 months, according to a study by the European Wind Energy Association (EWEA). For the first nine months of 2002, Europe's wind capacity reached 20,447 megawatts (MW), or almost three-quarters of the world's total. Most of the growth is credited to countries responding to international targets for reducing greenhouse gas emissions (GHG), EWEA reports.

For example, Germany built nearly 2,000 MW in 2002, bumping its share of the continent's wind power up to 50 percent. At climate talks in India, the German government announced it intended to cut GHG emissions by 40 percent by 2020.

Other countries are also being swept away. Spain built 742 MW last year; together with Germany and Denmark it accounts for 84 percent of European wind energy. Denmark has the highest rate of consumption of wind power at 18 percent.

EWEA predicts that within eight years, the total amount of wind energy worldwide could be 10 times what Europe has today, and worth over 130 billion Euros (approximately the same in dollars.)

THE ROLE OF THE BOARD
Excerpts from an interview with Steve Baum, CEO of Sempra Energy, after a conference on investor confidence in American business in Washington, DC.

What qualities are important for CEOs as they work with today's corporate boards?
Baum: Communication skills are critical—being able to talk about the company's finances and its business in a way that's understandable to investors. I also think that CEOs in the past have had too cozy a relationship with boards of directors. Nowadays, the CEO needs to be more comfortable in dealing with much greater levels of board independence. The board should actually encourage this. That's a difference of ambiance, if you will, from what existed in the past.

Can you explain a little about Sempra's board?
Baum: I'm the only insider on the board, and I'm not on any of the critical committees. We've made it a point to recruit new people for the board. The first criterion for selection was to be an active CEO. That way, you get people who are dealing with the same problems you are. In the past, there may have been a greater interest in community involvement because our boards came from the local utility. That was a different atmosphere. Now we're a worldwide, international company, and utilities are a large part—but still just a part—of the company. Thus the board should have a much different perspective and experience.

What role does corporate brand management play in restoring investor confidence?
Baum: If a corporation's image is tarnished, it hurts the utility's brand and its product. In the kind of business we're in, utility companies have their own brands, and corporate governance is less of an issue than rates—there are direct correlations among favorability, credibility, and the rate (especially the rapidity with which the rate changes upward). But the parent company's corporate governance has a halo effect on the utility.

What is it like to be CEO of a Fortune 500 company today?
Baum: From a personal perspective, it's really distressing. One works all one's life to get to a position of real responsibility and authority—and then to be viewed as a person without any ethics or morals is a very troubling thing. I am not like that; and neither are most CEOs. So I'm anxious to get through this period, increase transparency in corporate governance, and restore investor confidence. No one wants to be vilified.

ENERGY AND POVERTY
Most of North America's inhabitants take easy, affordable, and reliable access to electricity for granted. But, according to the International Energy Agency's (IEA's) 2002 World Energy Outlook, for another 1.6 billion people in the world, that access is unattainable. More important, IEA found that reliance on electricity ends the cycle of poverty.

The report concluded that inexpensive and readily available energy is indispensable to raising people out of poverty but must be complemented by clean water, sanitation and health services, a good education system, and a communication network.

According to IEA, which compared world poverty and electricity access for the first time since the Outlook was published, lack of electricity sustains a household reliance on biomass (wood, for example) and coal, which in turn creates economic burdens. For example, women and children in India spend two to seven hours daily gathering firewood, time that otherwise could be applied toward farming or other productive tasks. In sub-Saharan Africa, many women carry 44 pounds of wood an average of 3.5 miles a day, expending large amounts of energy just to get another meal on the table. The report also found that 2.4 billion people living in South Asia and sub-Saharan Africa rely on biomass for cooking and heating even if they have access to electricity. At the same time, 2.8 billion people live on less than $2 a day, the "poor" as defined by IEA.

The report highlights other restraints on economic and social development. Gathering wood for fuel leads to scarcity and ecological damage in areas of high population density. Burning wood in (usually) inefficient stoves is much less efficient than using liquefied petroleum gas, for instance—wood's heat value is four times lower. Burning wood or other biomass also can lead to higher instances of health problems from smoke inhalation—the World Health Organization estimates that 2.5 million women and children die prematurely each year from breathing fumes from indoor biomass stoves. And the use of biomass as a primitive energy source inhibits agricultural productivity. In India alone, the dung used as fuel would be worth $800 million a year if it was used instead as a fertilizer.

Moreover, the transition to electricity and modern appliances is not smooth. Instead, most households continue to use a mix of fuels as their income increases. Three factors influence the fuel a family will use, according to IEA: availability, affordability, and cultural preferences. For example, even in rural areas where electricity is available, many families perceive that biomass is cheaper and more readily available, and therefore do not switch. In India, wealthy households continue using biomass stoves to bake their bread, a cultural tradition that prevents a total transition to electricity.

Electricity consumption is strongly correlated with wealth, according to the report. (See Figure 1.) More than 99 percent of people without electricity live in developing countries, and four out of five live in rural areas. Still, those numbers are changing gradually. From 1970 to 1990, the number of people without access to electricity in the world's population changed downward by 10 percent. Most of that change is attributable to aggressive campaigns to reduce poverty in China, which has achieved an electrification rate of 98 percent—most of it coal-fired and hydropower—by building basic infrastructure and creating local enterprises. But while almost everyone in China has access to electricity, in many cases the services are unreliable, and wiring and meters can be unsafe.

IEA predicts that by 2030, about 2 billion people will have transitioned to reliance on electricity. That rate will vary according to region, and there still will be 1 billion people in the world left using primitive energy sources.

CRM: THE CRUCIAL RETURN
Excerpted from "Mind the Gap," a 2002 Accenture survey of executives in 1000 top companies worldwide.

The profitability of customer relationships remained (as it was in 2001) a top executive priority for almost 50 percent of all respondents. However, this year's more detailed questionnaire produced an interesting [finding]—that is, the desire to produce a better return on customer relationship management [CRM] investment currently exceeds the desire to expand [CRM] capability. Reflecting a broader shift from volume to value in customer acquisition and service strategies, companies appear to be chiefly concerned with finding and targeting the most profitable customers, maximizing "share of wallet" and improving average and lifetime revenue-per-customer ratios.

While it is true that shareholders' demand for earnings growth, parsimony, and reduced risk account for some of this focus on returns, there's far more to it than that. For one thing, companies are being pushed just as hard—by an increasingly sophisticated customer base—to make smarter marketing decisions and enhance service. [See Figure 2.]

Adding to this complexity is the continuing fragmentation of marketing audiences. The average consumer is now bombarded with 3,000 marketing messages a day, versus 650 in 1985. Increased global competition, more product and channel diversity, and better access to product information also help make customers more elusive.

The cost of these divisive factors? According to Accenture estimates, the amount spent on marketing by the Global 1000 is expected to grow from $825 billion in 1999 to $1 trillion by 2003.

It gets worse. Despite this exponential expansion of the cost of acquiring customers, the return on marketing investment continues to decline. Direct and email marketing response rates have dropped significantly. For example, the rates of response to direct-mail solicitations for credit cards fell from 2.8 percent in 1992 to 0.6 percent in 2000.

Part of this poor showing is due to the fact that customers are increasingly fickle. Many companies simply fail to keep them long enough to recoup their investments. For example, in 2001, mobile customer churn cost the cellular telecommunications industry an estimated $122 billion in terms of unrecovered customer acquisition cost and annualized lost margin. We can see the same dynamic at work in nearly every customer-centric industry. Concurrently, customer service costs also are rising, especially in interaction-intensive industries. Communications is again a case in point, as is retail banking. This, too, erodes the average revenue per customer down to dangerously thin margins.

While these trends have been picking up steam, they have been with us long enough to have provoked a sizeable response. Over the last decade, many companies have acquired extensive capability for managing customer relationships more efficiently. The problem is that many of these programs have failed to achieve their objectives. According to a study conducted by the online publication crmindustry.com, 56 percent of U.S.-based companies have not achieved a measurable return on their [CRM] investment.

New capabilities for managing customer relationships can help companies address the dual challenges of needing to do more and needing better returns on those investments. [S]ome companies will need to transform their sales, service and marketing capabilities in toto, not to mention securing the significant funds required for such an effort.

FAKE OUT
You've seen the knock-off Rolexes and Hermes scarves. Now, for the first time, electrotechnologies have made it to the top 10 counterfeiting list. The United States Customs Service recently listed batteries as the number four item to be counterfeited, just behind apparel, media, and watches and parts.

Counterfeit batteries seized in 2001 represented 9 percent of the value of total customs seizures, amounting to more than $5 million. Along with batteries, customs also seized and destroyed more than $4 million worth of counterfeit electrical equipment, out of a total of $57 million of counterfeit seizures overall. Counterfeiters not only refurbish products and make them appear of brand-name quality, they also go to great lengths to make items appear as though they have been certified and approved by placing false certifier marks on them. In one instance, a circuit breaker with counterfeit marks on it was found in a hospital panel to which life support equipment was connected. A recent white paper by CSA International, an organization that conducts product testing, states that "widespread use of counterfeit marks undermines the entire North American system of standards, testing, and certification that has been put in place to protect the interests of retailers, regulators, specifiers, product manufacturers, as well as consumers."

According to CSA, other counterfeited electrical products have been found that use substandard materials and compromised electrical spacing—potential shock and fire hazards. Ground fault circuit interrupter receptacles were also discovered that did not have a ground fault safety circuit to protect against overload or shock.

The International Anti-Counterfeiting Coalition has estimated that trademark counterfeiting costs the United States $200 billion annually in product sales, distribution, and lost jobs. Buyers can beware by comparing the marks and looking for irregularities, or by being suspicious of deals that appear "too good to be true."

FESTIVAL EXTRAORDINAIRE
While some communities that have a special link to Thomas Edison—like West Orange, NJ and Milan, OH—may celebrate his 146th birthday on February 11 with a piece of cake or a special event, Fort Myers, FL, where Edison built his winter home on the Caloosahatchee River in 1885 and spent 29 subsequent winters, is a little different.

Beginning the last week of January, residents of the town will celebrate Edison's birthday for no less than two weeks. The event was instituted in 1938 as the Edison Pageant of Light, a three-day celebration that included a Coronation ball, parade, and concert.

Since then, public enthusiasm for the festival grew to the point that Pageant organizers decided to form a non-profit corporation to handle its planning. These days the Edison Festival of Light, Inc., kicks off the party with a science and inventors' fair for elementary, middle, and high school students to showcase their projects and inventions—last year, students demonstrated a mosquito trapper (a promising product for southwest Floridians), a manatee locator, and an "ants-b-gone" dog dish. The festival also will include a block party, flower show, several parades, birthday party, sing-a-long tribute to Mrs. Edison, craft show, and antique car show. It will culminate on Saturday, February 15, with parades, a 5K running race, and fireworks.

© 2008 Edison Electric Institute