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Chesapeake to overhaul board amid investor criticism


   Chesapeake Energy Corp. could be on its way to making amends with disgruntled shareholders. 

BY JAY F. MARKS Business Writer   Modified: June 5, 2012 at 8:44 am •  Published: June 5, 2012

“We are pleased to announce these important actions taken by the board in consultation with our two largest shareholders to further enhance Chesapeake’s corporate governance for the benefit of all shareholders,” said Merrill A. “Pete” Miller Jr., Chesapeake’s lead independent director. “We greatly appreciate the substantial contributions of all of our directors, but recognize our shareholders’ desire for change. 

  “Following implementation of these initiatives, the Chesapeake board will have been substantially reconstituted with five new independent directors, including a new independent chairman, in addition to Lou Simpson who joined the board last year.”   

The board announced plans May 1 to replace Chesapeake co-founder McClendon as the company’s chairman amid ongoing questions about personal loans used to fund his share of the company’s wells.  

Reuters reported April 18 that McClendon had secured up to $1.1 billion in loans using his 2.5 percent stake in the Chesapeake wells as collateral. Some of the loans reportedly came from a private equity firm doing business with the company, spurring questions about a potential conflict of interest and a board review.   

Several institutional investors, including Icahn, subsequently called for a leadership change at Chesapeake. Some called on investors to vote against the re-election of Oklahoma State University President Burns Hargis and retired Union Pacific Corp. executive Richard K. Davidson to the board.   

New York City Comptroller John C. Liu, who wrote a May 17 letter urging shareholders to replace Hargis and Davidson, was heartened by Monday’s announcement.  

“This agreement goes to the heart of the problem — the directors themselves — and hopefully will result in an independent board that acts in the long-term interests of the company and its shareowners,” Liu said. “We look forward to the naming of new directors and other changes that address long-standing shareowner concerns. By voting for proxy access, shareowners can help hold new directors’ feet to the fire if they fail to exercise independent oversight of management.”

   News of the pending board shake-up boosted Chesapeake’s stock to $16.52, up 94 cents a share. 

  “The changes on the board are a positive step in the right direction ” Oppenheimer analyst Fadel Gheit said. “I don’t think it is a cosmetic change. I think it is a much-needed real change.”   

Argus Research analyst Phil Weiss said the board changes should address some of Chesapeake’s governance issues, but there are lingering questions about the company’s strategy to become a bigger oil and natural gas liquids producer. 

  Weiss noted Chesapeake has been forced to sell some of its acreage in liquids-rich areas to make up for a funding shortfall.  

Icahn said he is optimistic about the company’s future.

   “Under Aubrey’s leadership, Chesapeake has assembled great assets and I am confident I can help the company create significant shareholder value from these assets,” he said. “We enjoyed a very good relationship when I acquired almost 6 percent of the company’s stock in late 2010 and I look forward to a similarly constructive relationship now.” 

  Icahn or one of his representatives will occupy one position on the reconstituted Chesapeake board, while the other three new members will be designated by Southeastern Asset Management.

   The Memphis-based money manager, which owns more than 13 percent of Chesapeake’s stock, already had placed Simpson on the board. 

  “We are pleased that Chesapeake is being responsive to issues raised by us and many of the company’s other shareholders,” Southeastern’s CEO O. Mason Hawkins said. “These steps to reconstitute the board will enhance oversight and provide greater accountability.” 

  McClendon said the changes were the result of the board’s ongoing efforts to address shareholder concerns.

   “I am fully supportive of these measures and remain focused on executing Chesapeake’s strategy,” he said. “I have great respect for the talent, commitment and dedication of our current board members, each of whom has played a key role in helping build our successful company. 

  “At the same time, I look forward to working with our new directors to continue creating substantial shareholder value from the extraordinary set of assets Chesapeake has acquired and developed in recent years.”