Tom Fanning Southern Company Matrix Scandal: What don’t we know?

A long-time consultant for Alabama Power hired a private investigator to surveil Tom Fanning, the CEO of its parent company, Southern Company, according to documents reported by AL.com yesterday. 

Matrix, LLC, Alabama Power’s political firm, hired the investigator to follow Fanning and his girlfriend in 2017, according to AL.com’s reporting. Matrix has in recent months found itself at the center of scandals as its role in using private investigators, intimidation campaigns and smear tactics to advance the agendas of electric utilities in Alabama, Florida and possibly other states.

The AL.com story cited documents filed in court by Jeff Pitts, a former Matrix employee who splintered off the firm to form a rival company called Canopy Partners. Pitts and Canopy are in litigation with Matrix and its founder, Joe Perkins, in Alabama court. 

According to a court filing by Pitts, the surveillance of Fanning was initiated by Perkins “to influence corporate decision making and succession planning for his own benefit and at the direction of executives of Alabama Power Company.”

Perkins denied to AL.com that he played any role in the Fanning surveillance. 

A Southern Company spokesperson, “also speaking on behalf of Alabama Power, said it had recently learned of the surveillance and the company does not know who initiated it or why,” AL.com reported.

“Furthermore, to date, no information we have gleaned would indicate that the surveillance was instigated by, or at the behest of, Southern Company or its subsidiaries,” Southern Company spokesman Schuyler Baehman said Tuesday. “Simply put, we do not believe this was a company undertaking. We are as curious as anyone to learn who might have directed this sort of surveillance.”  

The stunning new allegations, which came less than one week after the announcement of Fanning’s resignation late on Friday, July 29, raise a host of questions about Alabama Power and Southern Company: 

1. Is the story connected to Fanning’s recently reported departure from Southern? 

Bloomberg reported late on Friday, July 29 that Tom Fanning “plans to announce his retirement in the coming months,” citing “people familiar with the matter.” A Southern spokesman said that “no decision has been made regarding the timing of Fanning’s departure,” Bloomberg reported at the time. 

Yesterday’s revelations cast Fanning’s departure in a new light. Southern’s Baehman “said that Fanning’s retirement was part of a succession plan and had nothing to do with surveillance or other issues,” AL.com reported. 

But the timing raises questions. 

Typically, companies of Southern’s size announce leadership changes in choreographed news releases, with successors having been telegraphed in advance in order to avoid unnerving investors. 

Southern has a mandatory retirement age of 65 for executives, and Fanning turned that age this year, but the company’s board “extended Fanning indefinitely” to allow for continuity of his leadership of the still ongoing Vogtle nuclear project, according to a company spokesman’s comments to Bloomberg.

Did knowledge of the Fanning surveillance, which Baehman said Southern “had recently learned,” or any factors related to it, prompt an accelerated departure for Fanning? 

If Pitts’ allegations are true, then an executive at Alabama Power was siccing Matrix to spy on their boss, Fanning.

The fact that the company had reached a state of dysfunction under Fanning’s leadership such that one of his subordinate executives reportedly hired a private investigator to gather compromising material about him could, if true, cause investors to lose faith in Fanning’s leadership. 

2. Why would Alabama Power executive(s) surveil Fanning? 

If Pitts’ account is to be believed, why would executives of Alabama Power surveil Fanning? Pitts’ filing says that it was to “influence corporate decision making and succession planning.”

At the time in 2017, Southern Company was desperate for cash, due to its financial disasters with the Kemper coal carbon capture plant in Mississippi, and the Vogtle nuclear plant in Georgia. As a result of those failures, the company had to sell Gulf Power, its subsidiary in the Florida panhandle, to raise cash. Investors were getting worried, and Fanning was hearing increasingly tough questions from analysts on quarterly earnings calls throughout 2017. 

Alabama Power would have been an obvious place to turn for cash. It was earning some of the nation’s highest profit margins for utilities, and Alabama’s regulators, who were elected in races that Alabama Power has allegedly used Matrix to influence, had not conducted a contested rate case since 1982. 

That dynamic could have increased tensions between Alabama Power executives and Fanning. And if executives thought Fanning was in a precarious position with investors over the Kemper or Vogtle struggles, they may have sensed an opportunity. 

Mark Crosswhite, not named in the AL.com story, is the Chairman, President and CEO of Alabama Power; he’s led the subsidiary since 2014.

3. Will the Alabama PSC or FERC crack open any of Southern’s books? 

Did Alabama Power executives in fact commission the surveillance on Fanning, as Pitts alleged? If so, who specifically was behind it? Why did they do it? Was it someone else? 

Any of those questions will be difficult to answer without thorough investigation either by law enforcement authorities or the Alabama Public Service Commission, the company’s notoriously lax regulator.

The PSC could subpoena records that would shed light on the relationship between Alabama Power and Matrix, and the relationship between Alabama Power and Southern Co. It could also audit Alabama Power’s finances and ask questions of witnesses under oath. 

The current PSC has not shown an inclination for that kind of oversight, however. A report comparing different utility commissions from Brown University’s Climate and Development Lab called the Alabama PSC “one of the most opaque, politically motivated, and environmentally hostile commissions in the country,” and noted that “weak transparency rules allow much of APSC regulatory decision-making to occur privately between commission officials and Alabama Power.” 

The Alabama PSC has gone 40 years without holding a contested rate case that allows for public scrutiny of Alabama Power’s finances, and for third parties to intervene and ask discovery questions of Alabama Power

4. Who will lead Southern next? 

With Fanning on the way out, Southern said on Friday that it had launched a search to replace him. Fanning has been the CEO and Chairman of the Board of Southern since 2010. Any of the company’s senior executives would have been part of the team and culture that he shaped there. 

If it’s true that Alabama Power executives directed Matrix to hire a private investigator to find compromising material on Fanning, that – along with the other actions that Matrix has been accused of taking at Alabama Power’s direction – would make a parody out of Southern’s “code of ethics,” which includes a section on “ethical decision-making.” 

“How would it look in the newspaper?” that section asks employees to consider. “ Would you be proud to tell your children or parents? If you’re in doubt, it may not be the right decision.”

Climate-focused investors have pushed shareholders, since as early as 2014, to remove Fanning as the board chair and to create an independent board chair who would “oversee the strategic transformation necessary for Southern to capitalize on the opportunities available in the transition to a low carbon economy.” Shareholders concerned with corporate governance have been critical of companies that allow their CEO to simultaneously chair the board of directors. 

Intel’s former Chair Andrew Grove stated, “The separation of the two jobs goes to the heart of the conception of a corporation. Is a company a sandbox for the CEO, or is the CEO an employee?  If he’s an employee, he needs a boss, and that boss is the board.  The chairman runs the board.  How can the CEO be his own boss?” 

Southern investors and the company’s board will have a choice: they can appoint a leader who has been part of the corporate culture that led to executives surveilling one another, to the use of Matrix to allegedly smear opponents and manipulate elections, and to failed energy megaprojects like Kemper and Vogtle – or they can bring in an outsider who can instill governance reform and lead a faster transition away from fossil fuels.

Investors and the board will also have to choose whether to pursue a broad investigation of board governance and oversight practices that led to the current situation at Southern or to attempt to sweep the scandal under the rug.

Header image: Matrix/Alabama Power/YouTube, EPI.