Icahn’s Chesapeake stake puts governance before value

May 29 (Bloomberg) -- In 2009, investor Jeffrey Bronchick told directors of Chesapeake Energy Corp. that he was disgusted with their leadership.

“I have never seen a more shameful document than the Chesapeake proxy statement,” he wrote in an April 23, 2009, letter to the board after it paid Chief Executive Officer Aubrey McClendon $100 million in a year when the company’s shares plunged 59 percent. The proxy is “a near perfect illustration of the complete collapse of appropriate corporate governance,” he said in the letter, which was cited in the book “Money for Nothing” by John Gillespie and David Zweig.

Three years later, Oklahoma City-based Chesapeake is embroiled in a new controversy over directors’ close ties to McClendon, insider deals and off-the-books loans. Bronchick, however, sees things differently. The natural-gas producer is a good value investment, and the problems with the board no longer bother him, he said in an interview.

“Chesapeake’s board doesn’t engender confidence, but the problem isn’t governance, it’s $2 gas prices,” said Bronchick, head of El Segundo, California-based Cove Street Capital, which held 306,088 Chesapeake shares at March 31. “I would have thought that after what McClendon went through in 2009, he would have adopted stricter governance, tightened capital spending and stopped having to be the biggest guy in the room. Still, he can pull it off once gas hits $3 or $4” per million British thermal units. Gas ended last week at about $2.50.

New Chairman

The tension investors sometimes see between appropriate corporate governance and possible rewards from value have rarely been more apparent than in the case of Chesapeake. The board is drawing increased attention because billionaire investor Carl Icahn, known for pushing for change at the companies in which he invests, last week announced he bought a 7.56 percent stake and demanded four directors be replaced.

The board was already searching for a new chairman to replace McClendon, who will remain CEO and a director of the company he co-founded 23 years ago. That search began after revelations last month about McClendon’s borrowing from firms that do business with the company. The stock dropped 29 percent this year through May 25 because of questions about McClendon’s leadership and low prices for natural gas.

The company responded to Icahn with a statement on May 25 saying that “after an independent chairman is named, the board’s nominating committee will consult with shareholders and carefully review Mr. Icahn’s request for board representation.”

Previous to that Chesapeake had said it was confident of the board’s independence, according to a May 20 statement by Michael Kehs, a company spokesman. Chesapeake is handling all requests for comment from directors, Kehs has said.

“Each of Chesapeake’s directors has built a superb reputation based on impeccable credentials, independent judgment and unwavering integrity,” he said.

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