The New York City comptroller is urging fellow Chesapeake Energy Corp. shareholders to vote out board members Burns Hargis and Richard K. Davidson at next month's annual meeting.
Hargis, president of Oklahoma State University, and Davidson, former CEO of Union Pacific Corp., both are up for re-election at the company's June 8 annual meeting.
Comptroller John C. Liu, who manages $122 billion in assets for the city's pension funds, said Chesapeake's shareholders deserve board members who are more responsive to their needs. New York City Pension Funds owns 1.9 million shares of Chesapeake stock.
“Shareowners urgently need new directors who are willing and able to exercise strong, independent oversight of Aubrey McClendon, a willful CEO with a penchant for risk,” Liu wrote Thursday in a letter to others who own Chesapeake stock.
Hargis and Davidson, who each earned more than $500,000 in cash, stock and other considerations last year as directors, are part of the Chesapeake board's audit committee.
“We believe recent revelations regarding previously undisclosed transactions ... demonstrate the audit committee's costly failure to act in the best interests of shareowners,” the comptroller wrote.
Liu said shareholders should vote “withhold” on Hargis and Davidson, while casting ballots in favor of a proxy access bylaw that would allow certain shareholders to nominate director candidates.
Hargis referred all Chesapeake queries to the company, whose spokesman declined to comment Thursday on Liu's letter.
Chesapeake recommends retaining Hargis and Davidson and rejecting the comptroller's bylaw, which officials maintain is not “necessary or appropriate,” according to its May 11 proxy statement.
Argus Research Analyst Phil Weiss said he doesn't know how much sway the comptroller's opinion will have on Chesapeake shareholders.
“I'm sure they are not the only organization thinking this way,” Weiss said. “Having them public
Weiss previously has called for a change in leadership at Chesapeake.
Questions about the company's financial well-being have caused additional turmoil.
Chesapeake's stock was down 49 cents Thursday, closing at $13.55 a share. The stock price has shed close to 30 percent of its value in the past month, erasing more than $10.5 million from the New York City Pension Funds' holdings.
Liu listed his concerns about several recent revelations by the media or the company of “substantial, previously undisclosed liabilities, transactions and conflicts of interest involving Chesapeake and its CEO.”
“These recent revelations are particularly troubling given that Chesapeake's directors have faced high shareowner opposition votes and litigation in recent years for approving related-party transactions with the CEO, as well as for awarding excessive CEO compensation and perquisites despite long-term underperformance and being unresponsive to shareowner concerns,” Liu wrote.
Liu said he raised similar concerns with Merrill A. “Pete” Miller Jr., Chesapeake's lead independent director, in a March 2011 meeting.
The comptroller previously had urged the board to replace McClendon as Chesapeake's chairman and discontinue the perk that allows him to buy a stake in every well the company drills, according to his letter.
Both reforms have been enacted in light of recent media reports and related Chesapeake disclosures about personal loans McClendon secured using his stake in company wells.
“While positive steps, they are inadequate and taken under duress, underscoring the need for the strong accountability mechanism that the proposed proxy access bylaw would provide,” Liu wrote.
New York City Pension Funds does not hold enough Chesapeake stock to exercise the proposed bylaw, the letter noted.
The bylaw would allow shareholders that hold at least 3 percent of the company's stock continuously for three years to include board nominees in Chesapeake's annual proxy statement.
“These are the same terms as in the proxy access rule adopted in 2010 by the SEC for all public companies,” Liu wrote.
The rule later was voided on procedural grounds by a judge.