A company’s governance and its environmental and social performance are increasingly linked to the bottom line. In fact, in many instances the distinction between financial and nonfinancial information is disappearing. A wide variety of stakeholders, including shareholders, financial analysts and rating agencies, are working to understand the potential impacts of environmental and social issues on core business functions. Many consider the distinction between financial and nonfinancial information to be artificial and counterproductive in this effort. 

AEP is very familiar with this evolution. Electricity is vital to quality of life and is the nexus of societal needs and considerations that include public policy, environmental performance, financial health, operational reliability and economic prosperity. We take these responsibilities very seriously and know that they are interdependent.

The convergence of financial and nonfinancial performance has created a dynamic and more complex portfolio of risks and opportunities that is getting closer scrutiny throughout the company, including in the board room. We asked two AEP board members to share their views on these issues.

Tom Hoaglin is chairman of the board’s Committee on Directors and Corporate Governance, which has oversight of AEP’s Corporate Accountability Report. He is the retired chief executive of Huntington Bancshares in Columbus, Ohio, and has served on AEP’s board since 2007.

Lionel Nowell is chairman of the board’s Audit Committee. He is the retired senior vice president and treasurer of PepsiCo Inc., of Purchase, New York. He has served on AEP’s board since 2004.

How is sustainability discussed and considered at the board level?

Tom Hoaglin: It is important that our board – any board – understands what it takes for a company to have sustainable success. In our case that includes financial performance because that’s what our investors demand. At the board level, it starts by selecting the right CEO, making sure the organization has a good succession plan, ensuring the organization has a strategy that can yield, over time, success that is sustainable, and overseeing the company’s risk management processes. Increasingly, however, factors such as adherence to environmental needs and regulations, safety issues and the reliability of operations contribute to the financial success of the organization. Without focus on those issues that are so important to sustainable results, you only have half a loaf. And I think that’s why our board is so fundamentally aware of and committed to the importance of sustainability. These topics are discussed regularly in full board meetings and in most committee meetings.

Lionel Nowell: Without question, the board is committed to AEP being a responsible corporate citizen and embraces sustainability as a core value and operating principle. We believe that having a self-regulating mechanism helps the company ensure that its business practices reflect responsibility for, and are in compliance with, environmental, social and economic standards, which is the right thing to do and a prerequisite for success. Through discussions held at the Committee on Directors and Corporate Governance and subsequent full board meetings, we address actions being taken by the company relative to our sustainability commitments, and review appropriate data to ensure those actions have a positive impact on our shareholders, our customers, our employees, the environment and other stakeholders. Recent studies suggest equity analysts are starting to issue more favorable ratings to companies that exhibit exemplary corporate social responsibility practices in the same manner as financial performance. Furthermore, the board actively promotes the inclusion of public interest into our decision-making process by voluntarily eliminating business practices that are not consistent with our sustainability objectives. As a result, concern about sustainability influences our thinking and helps to shape our actions.

AEP invests significant time and energy engaging with shareholders and many other stakeholders. What’s the board’s perspective on this process?

Tom Hoaglin: Within our industry there is an instinctive aversion by some company executives to working with stakeholders such as environmental groups. Yet, I have been so impressed with AEP’s approach, as I think the whole board has, that we recognize the importance of this engagement. We encourage and support management’s efforts to reach out to these constituencies, make themselves accessible, keep lines of communication open and listen to their viewpoints and consider them in decision making. We may not always agree, but their point of view is important to us. I think we are all aware that our generation fleet will migrate, over time, to being less coal-centric, but we have to do it at a pace that is digestible for regulators and our customers. The way to get the optimal pace and plan includes making sure we hear the points of view of all of our stakeholders. 

Lionel Nowell:  I agree with Tom. The common thread is having constructive, open and honest communication. We want to collaborate and have a dialogue because that helps us to come up with solutions that can be mutually beneficial to all concerned parties. And I believe the effectiveness of our approach is suggested by our success in the regulatory arena and the fact that we received no shareholder resolutions this year. Ultimately, our ongoing challenge is to help all of our stakeholders, including our shareholders, understand that we have to work together and respect each other’s goals and objectives if we are going to be effective in delivering safe, reliable and affordable electricity to customers and fair returns to our shareholders while meeting our social responsibilities.

Risk assessment and risk mitigation have become increasingly high priorities for many companies, including AEP. What is the board’s role in risk management?

Lionel Nowell: Risk oversight is one of the top priorities for both the board and AEP management. While we have always focused on risk, we’ve taken additional steps to improve the process by developing a framework for constructively examining our risk assumptions so we can better understand how unexpected events could affect AEP. We also evaluate and question whether potential unanticipated events are real threats, potential opportunities, or both. Our overall objective is to avoid blind spots by being more proactive. So we have put in place a dynamic risk review process, stewarded by the Audit Committee but owned by the full board, which allows us to create a portfolio of strategic options that prepares the company to be both resilient and responsive to threats and open and agile enough to seize upon opportunities.

The board is fully and fundamentally aware of AEP’s responsibility to comply with laws and regulations and to deliver energy to our customers in the most efficient manner. We are always looking to develop competitive advantage in managing and operating the company. Although this is a company with growth potential, our ongoing risk will be our ability to achieve everything we have to do in a way that will meet the desires of our stakeholders while creating value for our shareholders.

Tom Hoaglin:  AEP has a very organized, disciplined approach within its executive ranks to manage risk, which has served us very well. The board itself is not directly involved in managing the company’s risks; our role is to oversee the processes management uses to manage risks. The management team is responsible for identifying short- and long-term risks facing the organization and for assigning responsibility and accountability for managing and mitigating those risks. Each of the board’s committees is assigned the appropriate risks to oversee in concert with management. We receive regular updates to ensure that the risks we all agreed upon are getting the right attention and are being mitigated. And that’s what our investors would expect and require, and I think all stakeholders would expect that. After all, a company that manages risk successfully is likely to have fewer blips along the way and deliver a much higher level of performance.

Describe the intersection of ethics and compliance, risk management and corporate governance as it relates to AEP’s board.

Tom Hoaglin:  A successful business includes a commitment to ethical behavior, to prudent and rigorous risk management and to good corporate governance. All three tie together. If you have ethical behavior, chances are you will naturally reduce some kinds of risk. Conversely if you have unethical behavior, your risks are greater and more numerous. So you need to develop and embed in your organization a culture that recognizes these linkages. At AEP, corporate governance, be it management or the board, acknowledges the importance of both risk management and ethics compliance and we insist upon excellence in those areas, just as we do in the financial area.

Lionel Nowell: At AEP the Board of Directors has always taken steps to ensure that ethics and compliance, risk management and corporate governance are aligned with the overall corporate strategy. I personally think these three attributes are the foundation upon which a successful company is built. The board’s involvement with management in overseeing and discussing all three of these important measures allows us to balance decision-making and to ensure that appropriate actions are taken to protect our stakeholders and enhance shareholder value.

Why is it important for boards to have independent directors? What is the advantage?

Lionel Nowell:  Independent directors serve on boards for the benefit of the company’s shareholders. Having contrasting points of view between the board and management can lead to creative solutions that result in better services and processes. An independent director can also provide a fresh, objective look at business challenges and opportunities, and offer advice that considers the perspectives of all parties. In addition, determining executive compensation is always a challenge and having experienced independent directors who can work with outside consultants to create competitive compensation definitely helps address corporate governance concerns. From my perspective, an appropriately structured board of directors makes good business sense and having qualified, independent directors – as we have at AEP – helps to ensure good corporate governance and is a great service to the company and its shareholders.

Tom Hoaglin:  Board independence is very important and becoming the norm, with more boards having the CEO as the only inside director. If you think about the primary objectives of a board, you can’t really be as effective in your oversight role if the board’s makeup is not independent; independence helps to provide both perspective and credibility. It’s very important for the board and management to have a good working relationship, which we do at AEP, and for the board to be supportive of management. However, perspectives are going to be different. It’s management’s role, for example, to develop a strategy and business plan – not the boards. But it’s the board’s role to comment on it, shape it and approve it. To do that effectively you need the independence to articulate differing points of view, forcefully if necessary, to yield the best results for shareholders and other stakeholders. It’s the same with risk management. So if management, which is focused on day-to-day activities, is of one mind about certain risks, the board needs to be able to express different perspectives, perhaps a long-term view or a different way to manage risk.

AEP’s board review of the report and its published statement regarding its expectation regarding the company’s continuing efforts is unique and widely respected. Why is it important to the board to issue this statement each year?

Tom Hoaglin:  As a board, we share management’s belief in the fundamental importance of the environmental and social activities in which the company is engaged and we therefore want to hold the organization accountable. My experience is if you are public about what you are doing, and invite accountability, you’ll get better performance. Management and the board are in concert in this belief. If you have a mutual commitment to certain objectives, then I think you ought to welcome outside scrutiny and public accountability. That’s what is behind the board statement.

Lionel Nowell:  The board statement reflects our desire to communicate to all of AEP’s stakeholders the importance we place on supporting and valuing the company’s sustainability. To us sustainability isn’t just a compliance requirement, it is a business reality. We are deeply committed to ensuring the company has sustainable business practices in place that positively address economic, environmental and social challenges. The board truly believes AEP management has a responsibility and should be held accountable for making a difference in the lives of its employees, customers and stakeholders, and for being transparent about how the company is doing that.