Two influential shareholder advisory groups Monday joined the call for new leadership at Chesapeake Energy Corp.
Institutional Shareholders Services and Egan-Jones Proxy Services are urging Chesapeake shareholders to vote against another term for board members Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, who is retired from Union Pacific Corp. Both are up for re-election at next month's annual meeting.
“The continuing directors serving on this board have repeatedly failed to respond to significant shareholder concerns and emerging best practices, demonstrating a lack of independent oversight at a board chaired by a founder/CEO,” ISS said in its 46-page report to shareholders.
Egan-Jones expressed a similar sentiment, calling the board's oversight “egregiously weak.”
New York City Comptroller John C. Liu last week called for a no-vote on Hargis and Davidson in a letter to Chesapeake shareholders. The city's pension funds hold about 1.9 million shares of Chesapeake stock.
Chesapeake maintains the current board members are the best candidates to lead the company.
“We strongly disagree with the recommendations of ISS and Egan-Jones,” spokesman Michael Kehs said. “Our two directors standing for election at this year's annual meeting, Richard K. Davidson and V. Burns Hargis, are strong, independent and highly qualified directors who have contributed significantly to Chesapeake during their 6 and 3 years of service, respectively.
“Mr. Davidson, Mr. Hargis and the entire Chesapeake board have taken a number of important actions to implement compensation changes and enhance corporate governance — and they remain committed to serving the interests of Chesapeake shareholders.”
Chesapeake and its directors have faced intense scrutiny since April 18 when Reuters reported that CEO Aubrey McClendon used his personal stake in Chesapeake wells as collateral for $1.1 billion in personal loans. In the following weeks, it was revealed that McClendon and Chesapeake co-founder Tom Ward — now CEO at SandRidge Energy Inc. — ran a $200 million hedge fund that traded in commodities, including natural gas.
Chesapeake has responded by moving to end the well participation program 18 months early in June 2013 and cutting director compensation. Also, McClendon has agreed to step down as chairman and a new, independent director will take his place.
ISS has been critical of the Chesapeake board's oversight of McClendon for several years.
“While the board is majority independent per NYSE regulations and ISS policy, its behavior suggests an inability or unwillingness to act independently of the co-founder, chairman, and CEO Aubrey McClendon,” according to the ISS report. “A board that ignores majority shareholder votes, provides excessive compensation for itself and management, and permits multiple related-party transactions is not placing shareholders' interests first. To the extent that change has come, it has been too little and too late, and is largely a reaction to unfavorable media attention.