A few weeks ago, Chesapeake Energy decided to send its CEO and founder, Aubrey McClendon, on his merry way.

The board's decision to dump McClendon is the latest and largest of a series of moves to win back shareholders and bring the company back into the range of reasonable corporate governance standards from the shareholders-be-damned outpost McClendon had staked out over the last few years.

Chesapeake's egregious governance practices are well known: the lavish pay to McClendon, his negotiated right to buy a 2.5 percent stake in every well Chesapeake drilled, supermajority voting, and board seats for McClendon's friends and insiders. GMI ratings gave Chesapeake a corporate governance grade of “F” as recently as a year ago.

McClendon's personal finances and business dealings were wound tightly with Chesapeake's. For example, the company purchased the naming rights to the arena in Oklahoma City where the National Basketball Association team, the Thunder, play for more than $36 million. Never mind that McClendon personally owns 19 percent of the team which he played a big role in luring from Seattle to his native Oklahoma City, and stood to gain mightily from the naming rights deal.

According to a report by Reuters, McClendon shuttled himself and family members to holiday destinations aboard the company's fleet of corporate jets, and used company resources for renovations on his personal residence.  It's pretty clear to most that McClendon was running the company as his personal piggy bank to fund a lavish lifestyle. The only real difference between McClendon and the Rigas family that ran Adelphia into the ground as they plundered it—John Rigas and his son Tim now sit in a federal penitentiary—is that much of his arrangements, despite their impropriety,  were at least disclosed to the public.

Chesapeake says McClendon's early exit has nothing to do with an ongoing investigation into his financial arrangements. "The Board's extensive review to date has not revealed improper conduct by Mr. McClendon," the company said in a statement announcing the retirement. It will release a full report on Feb. 21 along with its fourth quarter earnings report. Meanwhile, the Securities and Exchange Commission is investigating McClendon's loan arrangements and other allegations.

Board Games

It wasn't just McClendon's excesses that drew the ire of shareholders. There were plenty of shareholder-unfriendly governance structures put in place to preserve McClendon's tight grip on the company, including a staggered board.

A staggered board, also known as a classified board, is a structure where only some of the directors are elected each year. Some may serve  terms as long as three years or more, rather than having to survive annual elections . The arrangement makes it much harder for critical, perhaps even irate, shareholders to clean house, toss out an entire board, regain control of the company.

Tucked deep into the notice about McClendon's untimely “retirement”—he is 53 years old—was a notice about how Chesapeake would seek to have Oklahoma law changed so that it could declassify its board. Hmmm. Let's get this straight: Chesapeake needs to change state law in order to adopt a corporate governance standard that 87 percent of the S&P 100 now follow, and that shareholders universally welcome?

It's true. According to Oklahoma state law, where Chesapeake is incorporated, companies must have classified boards. The law entered the books in 2010, and it certainly seems odd that Oklahoma would move to enshrine staggered boards at a time when companies across the nation were doing the opposite, moving en masse to declassify them. Who could be behind such a rule change?

You guessed it: McClendon.  At the time the law was passed, Chesapeake,  in a statement, said  it participated in drafting it. Supporting staggered terms for directors, it said, promotes continuity of management and leadership.

It surely wasn't that difficult for Chesapeake to get the Oklahoma legislature to back a law that forced other companies incorporated in the state to go against the governance grain and classify their boards. Its board at the time consisted of a former Oklahoma governor, a former U.S. senator from Oklahoma, and the president of Oklahoma State University. Political clout? Check!

Chesapeake, as it seeks to regain the support of investors ahead of its upcoming annual meeting, has announced that it would now like to declassify its board. So the company is in the awkward position of having to crawl back to legislators and plead with them to reverse a rule that it pushed for just three years earlier.

 It's hard to imagine that Oklahoma wouldn't go along with Chesapeake's request. But either way it's a clear case of what can happen when state legislators give too much deference to the companies in their states. Certainly, Chesapeake is wishing it was more careful about what it wished for, back when it lobbied for the change as a defense against revolting shareholders.

And the whole affair is bad for Oklahoma, since it could dissuade companies from incorporating there and being subjecting to yo-yoing governance rules.

Topics