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.
“This year is no different, and the issues that we have highlighted in the past are now in public focus given recent revelations regarding the Chesapeake Founder Well Participation Program.”
Analyst Fadel Gheit is not surprised by the reports or the sentiment.
“It's the least you would expect. The stock is in a free fall. Shareholders are unhappy,” Gheit said. “They dislike what they see. It goes without saying there was no accountability, there was no fiduciary responsibility, there was poor governance. I think the board needs a complete makeover.”
Even if directors are not replaced, Gheit said the board must exercise more oversight.
“The last thing shareholders want is step-by-step approval going along with whatever management is telling them to do or say,” Gheit said. “They don't need to take an adversarial position, but at least they should play the devil's advocate. They need to kick the tires a bit. That doesn't mean they cannot have a drink together after a meeting or go for a round of golf, but they have to know that they are there to make money for shareholders and that it is their mission to safeguard shareholders' interest.
“That has not been very clear from the Chesapeake board over the years.”
However, Gheit said there is plenty of blame to go around, including for analysts who scrutinize the company.
“Shame on us. I have followed Chesapeake for many, many years. We should have looked under the hood,” he said. “We like the car and how it feels and how it looks, but there are engine problems that we should have noticed.”
Chesapeake's stock closed Monday at $14.91 a share, up 55 cents, or nearly 4 percent.
Hearing set for May 30
Chesapeake's annual shareholder meeting is set for June 8, although several shareholders who have filed lawsuits against the board have asked a federal judge in Oklahoma City to postpone it.
Attorneys contend shareholders do not have enough information to decide on compensation issues and the potential re-election of two board members because of inadequate disclosures.
U.S. District Judge Vicki Miles-
Analyst Fadel Gheit said any delay would be harmful to Chesapeake and its shareholders.
“Any uncertainty is not good. The last thing any shareholders want is more uncertainty,” he said. “There are so many things that could go wrong. Investors are very finicky. They would not want to deal with a situation like that. We already have a lot of market risk.
“The last thing you need is not knowing who's going to be running the company, what strategy it's going to have, is the company going to be for sale.”
Meanwhile, an Oklahoma County judge will hear arguments on Friday on a request by two Chesapeake shareholders to block any planned asset sales until the company provides a full accounting of CEO Aubrey McClendon's personal debt as part of a separate lawsuit against the board.