It's often difficult to evaluate the quality of a company's management and board of directors. With a lot of intangibles at play, it can be tough to point to specifics that say, "This is how you know the board is great" or "Here's how they're failing."
But then, every so often, a board comes along that makes it so darn easy. Enter Chesapeake Energy
Amid a tsunami of problems stemming from Chesapeake's charismatic CEO Aubrey McClendon -- everything from outlandish compensation to antique map purchases and a secret hedge fund -- the board has been astonishingly tone deaf. To be sure, the board has made some noise about improving governance practices, but much of it has been the equivalent of putting a tuxedo on a dog. And based on the reaction of many shareholders, few have been fooled into thinking that the hound is suddenly a fancy gent.
But even with all of the complaints about the company's board, you couldn't really ask for a better summary of their failure -- both in enforcing good governance and listening to shareholders -- than one line from the company's 2012 proxy statement.
In response to a raft of shareholder proposals aiming to improve governance at Chesapeake, the board responded with an attack on the value of good corporate governance, trotting out a study that questioned the value of governance changes and writing: "In other words, the study's findings suggest that there is no distinguishing between the long-term market performance of companies that have adopted corporate governance ideals and the long-term market performance of those that have not."
So in the wake of what could only be described as an epic governance failure, the best this board of cronies can manage is, "Yeah, well, we don't think good governance is all it's cracked up to be." New investors and veterans alike, take note -- a terrible board has reared its head and its name is Chesapeake.
What will be interesting to watch from here is whether these bad-news bears are able to weather the storm. Major shareholder Southeastern Asset Management has filed paperwork that could allow it to turn activist. Loud calls for change have also come from massive California pension fund CalPERS and the respective comptrollers of New York City and state. But perhaps most notable is the 7.6% stake that activist investor Carl Icahn took in the company. Along with his investment, he penned a letter that absolutely dressed down Chesapeake's board.
To this point, the board shows no signs of cracking to major shareholder proposals or Icahn's pressure to get board representation. That could make for an interesting scene at the company's annual meeting on June 8.
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