Chesapeake shareholders spoke out at the company's annual meeting, both in comments and in their votes.
Shareholders overwhelmingly rejected 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.
Both men, who comprise Chesapeake's audit committee, had been targeted for replacement by several institutional investors and shareholder advisory services.
“This is an overwhelming vote of no confidence in the board of directors and their oversight,” said Michael Garland, director of corporate governance for New York City Comptroller John C. Liu.
CEO Aubrey 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 board the company enjoys today.
“The absence of good governance practices has become even more apparent,” Armstrong 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 proposal received 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.
Another shareholder questioned the company's decision to spend $26 million in “apparently borrowed money” to support the Sierra Club's attack on the coal industry.
“Do you now think it was a mistake to unnecessarily create a fight with another fossil fuel,” the shareholder asked.
McClendon said the company was right to go after the coal industry.
“We're in a market share struggle with coal,” McClendon said. “As a result of that campaign, 150 new coal plants were not built. That demand will go to natural gas.”
Last month, the Sierra Club announced its new campaign “Beyond Gas,” in which it plans to go after the natural gas industry in much the same way.
“We are no longer associated with the Sierra Club,” McClendon said Friday. “Our relationship with them is a little different today than it was a few years ago.
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 in the day, Chesapeake announced the sale of $4 billion in pipelines and other midstream assets. The sales price is more than 35 percent of the company's total market capitalization based on the share price.
“That's with an asset many people didn't even know we had,” McClendon said. “We will continue our asset sale in 2012 and 2013 to pay for this transition to oil and liquids.
The Chesapeake board has been criticized for failing to rein McClendon after a series of reports questioning his personal financial activities. McClendon has secured up to $1.5 billion in loans against his stake in Chesapeake wells as part of a controversial incentive program that will be discontinued next year.
McClendon has agreed to step down as the company's chairman when a replacement is named later this month. He will remain company CEO.
The board, which was expected to meet after the shareholders' meeting, also this week announced plans to replace four members with new directors put forth by the company's largest shareholders Southeastern Asset Management and activist billionaire Carl Icahn.
The resignations of Hargis and Davidson open up two spots. The company has not revealed which other board members will make way for new directors.
The company has said the new board will be in place by June 22.
Besides the two directors, Chesapeake shareholders also voted down other company proposals.
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 to reincorporate in Delaware and make all directors up for election each year passed with 53 percent of the vote.
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.
“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 tings, reconstituting the board of directors. As previously announced, Chesapeake will add a new independent nonexecutive chairman and four new independent directors proposed by shareholders to its nine-member board within the next two weeks. Chesapeake will also take the necessary actions so that shareholders will have the opportunity to elect the entire board of directors at the 2012 annual meeting of shareholders.”