Chesapeake Energy Corp. shareholders on Friday spoke out against the company's leadership, both in comments and in their votes.
Stockholders overwhelmingly voted against Oklahoma State University President Burns Hargis and former Union Pacific Corp. executive Richard K. Davidson, the two directors up for re-election. Hargis received only 26 percent of the vote; Davidson received only 27 percent.
Chesapeake said the two directors turned in their resignation following the 65-minute meeting. The board “will review the resignations in due course.”
“Chesapeake appreciates shareholder feedback and will act appropriately with regard to the matters voted on today,” the company said in a statement. “Chesapeake has recently taken important actions to enhance corporate governance and increase management oversight by, among other things, reconstituting the board of directors.
Chesapeake announced Monday that four board members would be replaced with new directors chosen by its largest shareholders, Southeastern Asset Management and billionaire shareholder activist Carl Icahn.
The company has said the new board will be in place by June 22.
“Good corporate governance is at the essence of all well-run companies,” said Vincent J. Intrieri, a representative for Icahn. “We're extremely pleased the company has announced a reconstruction of its board. This is a positive step in the right direction.”
Intrieri had strong words for CEO Aubrey McClendon as well.
“We believe you are a great oil and gas man, but even great executives need oversight from a board that is focused on creating value,” he said.
Change won't come to the board immediately.
Southeastern, which owns more than 13 percent of Chesapeake's stock, said it would support retaining Hargis until the board's audit committee finishes its review of McClendon's finances.
“We are hopeful that this review can be completed in a matter of weeks not months,” the Memphis-based money manager said in a regulatory filing.
Chesapeake and its directors have faced intense scrutiny since an April 18 report that McClendon used his own stake in Chesapeake wells as collateral for up to $1.1 billion in personal loans.
The company has drawn criticism from several institutional investors and shareholder advisory services, including New York City comptroller John C. Liu.
A representative from Liu's office attended Friday's meeting. Michael Garland, the comptroller's director of corporate governance, said he expected the directors to be voted out, but he was surprised by the overwhelming vote.
“I am unaware of a vote against directors that high at any large public company. It's unprecedented,” Garland said. “Today's vote was more than about those two directors. It's about a referendum on the board.”
Garland said he is “cautiously optimistic” that the new board will provide improved oversight.
“We're hopeful that today's actions will initiate a long-overdue process to reconstitute the board with truly independent directors who will act in the long-term interest of the company, its shareholders and its employees,” he said.
McClendon faced strong questions and angry statements by some shareholders during the meeting.
Shareholder Gerald Armstrong criticized the board for repeatedly opposing his effort to change the company's incorporation to Delaware, where all directors would be up for election each year rather than the staggered terms the company enjoys today.
“The absence of good governance practices has become even more apparent,” the Denver resident told McClendon. “Accountability is what this effort is all about. It's time for a change.
“Five directors are likely to be replaced and it's likely you will not be with us next year. But I don't give up.”
Armstrong's nonbinding proposal passed with 53 percent of the votes cast. The company did not specifically address his effort to reincorporate in Delaware, but said it is working to change director elections.
“Chesapeake will take the necessary actions so that shareholders will have the opportunity to elect the entire board of directors at the 2013 annual meeting of shareholders,” the company said in a statement Friday.
Another shareholder asked how the new board will help the company decide whether to “kick the can down the road” by selling a few assets or whether it would consider selling the company outright.
“We don't intend to kick the can down the road,” McClendon said. “We intend to crush the can. We'll do that with asset sales.”
Earlier Friday, Chesapeake announced the sale of $4 billion in pipelines and other midstream assets. The sale price is about 34 percent of the company's total market capitalization based on its share price.
Besides the two directors, Chesapeake shareholders also voted against several proposals the company favored.
The proposal to change the company's bylaws to majority voting received 97 percent of the votes cast, but only 64 percent of the shares outstanding — less than the two-thirds required. But the board said it will adopt the policy, effective immediately.
The proposal to approve executive compensation failed, receiving only 20 percent of the votes cast. The annual incentive plan failed with only 31 percent of the vote.
Shareholders also overruled the board and voted in favor of several shareholder proposals directors had opposed.
The proposal that would give more control to long-term shareholders with at least a 3 percent stake in the company passed with 60 percent of the vote.
New York State Comptroller Thomas P. DiNapoli praised the shareholder actions and called on the board to act on them quickly.
“Today's voting results are a rebuke to the failed leadership of the board of directors of Chesapeake Energy,” DiNapoli said in a statement Friday. “The board should take immediate steps to implement the shareholder proposals that passed today ... The days of an entrenched and unaccountable board structure at Chesapeake must be numbered.”