Let’s connect some dots.

Con Ed just suffered a blackout that even some fans are describing as a public relations disaster. It’s conceivable that inadequate spending on plant maintenance was a root cause.

Separately, the Business Roundtable Institute for Corporate Ethics and the CFA Centre for Financial Market Integrity have come out in favor of abandoning the issuance of quarterly earnings guidance by major companies. Meanwhile, the SEC has just adopted new disclosure rules for executive compensation.

Is there a unifying theme here? Yes: In our view, all three developments stem from the prevailing focus on short-term financial results and the consequently flawed ways in which we measure and reward executive performance. The good news is that investors are beginning to demand new standards.The bad news is that such dissatisfaction has not yet spread to the political realm.

For the people who broiled in Queens last week, this message may be a little too subtle.They might actually prefer a public horsewhipping of those responsible for their discomfort. The problem is that it will be difficult to find the actual culprits.

So far, Con Ed personnel don’t know what went wrong. It’s not too surprising: Con Ed’s infrastructure is almost unimaginably complicated and just plain huge. It encompasses, among other things, 94,000 miles of underground cable (enough to circumnavigate the globe almost four times) and 36,000 miles of overhead cable. A basic toaster breaks down with alarming regularity, so think what can go wrong in a facility of that dimension.

Management’s challenges do not stop at wiring problems. Investment decisions have to be made in a complicated regulatory environment, satisfying environmental and security concerns as well as producing a desired rate of return. Con Ed has to please employees, investors, and customers. It is possible that the latter constituency is not always at the top of the list.

Naturally, we have no idea what caused the blackouts last week. But it’s easy to imagine that investing in updated equipment might sometimes have been postponed if it meant, for example, allowing management to continue its 32 years of consecutive dividend hikes.

In 2004, the company estimated that peak New York demand in 2005 would hit 13,025 megawatts; the actual total was 13,059 MW after invoking demand reduction programs, which artificially suppressed consumption. In this year’s annual report, the company describes peak electricity demand in New York growing at about 1.5% a year. In other words, in an industry that grows slowly and somewhat predictably, management was off more than 0.3% in one year. Investing for unrealistically low demand growth could certainly leave customers vulnerable.

Since 1997, the utility industry has flirted with the opportunities of deregulation. Although numerous analysts say Con Ed was apparently more conservative than most, management did stray from its core business, acquiring companies in related fields and investing in areas such as fiber optics, which now have been disposed of for the most part.

We may be wrong, but from the tenor of management’s comments it sounds as though its renewed commitment to upgrading and maintaining facilities may have been in reaction to some inattention to these areas in the past.The numbers seem to bear this out. In the 2000 annual report, management estimated that electric utility spending would actually decline, to $943 million in 2002 from $959 million in 2000. At the same time, spending for unregulated subsidiaries was projected to increase to $335 million in 2002 from $121 million in 2000. Such a diversion of funds might have cheated the basic utility business. If so, the Queens and Staten Islands outages may be a shot across the bow.

What does this have to do with recent recommendations from the CFA and Business Roundtable on deemphasizing quarterly earnings guidance? If indeed it turns out that Con Ed was nearsighted in its investment program, it will be yet another example of a management adhering to inappropriate short-term guidelines. In studying the harmful effects of managing for the near term, the CFA found that 80% of executives surveyed claimed that they would “decrease discretionary spending on such areas as research and development, advertising, maintenance, and hiring in order to meet short-term earnings targets.”

The amount of money and energy that managements spend on attempting to “game” quarterly earnings estimates is absurd, and wasteful in the extreme. One of the delights, we are told, of taking a company private, is that no such pressure exists. Managements are free to invest for the long term, and they do. This is doubtless one reason why there is such a rush to invest in private equity funds. Returns are higher in part because managements have the luxury of spending money in areas that will yield future benefits.

One of the recommendations from the CFA/Business Roundtable study is to “align corporate executive compensation with long-term goals and strategies and with long-term shareowner interests.” They also encourage “pay-for-performance” criteria for executive comp.

On this front, the new SEC disclosure rules may prove helpful, in that board compensation committees will have to analyze and discuss the most important factors used in determining pay. Although there is no directive as to what those factors should be, such a requirement will likely cause boards and management to articulate longer-term objectives. It will sound pretty silly if the most important factors include satisfactorily meeting analysts’ quarterly expectations.

Certain large companies such as Intel, Motorola, and Pfizer have indicated that they will no longer provide quarterly guidance.This is a good beginning on a long trail. Ultimately, at the end of the journey, if we have connected the dots properly, the residents of Queens and Staten Island may be a lot happier.

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