John Liu, the comptroller of the City of New York [which owns 0.25% of Chesapeake Energy (CHK)] recently filed a document urging that shareholders withhold their votes for Richard K. Davidson and V. Burns Hargis both of whom are up for re-election to Chesapeake's Board of Directors.
This week Chesapeake responded to Mr. Liu's letter first making sure to point out twice that Mr. Liu was representing shares that only own 0.25% of Chesapeake and then explaining why the two director candidates should be voted for by shareholders. Here is what Chesapeake had to say:
DIRECTORS RICHARD K. DAVIDSON AND V. BURNS HARGIS ARE STRONG, HIGHLY QUALIFIED INDEPENDENT DIRECTORS AND WARRANT SHAREHOLDER SUPPORT
Chesapeake's Board is comprised of independent, highly qualified and accomplished professionals who have the skills and experience necessary to serve on our Board. Specifically, our two directors standing for election at this year's annual meeting, Richard K. Davidson and V. Burns Hargis, have served on our Board for six and three years, respectively. Both are highly credentialed professionals who bring to the Board financial, operational and legal expertise that benefits the Board, Chesapeake as a corporation, and its shareholders.
Mr. Davidson's distinguished career in the railroad industry spanned nearly 50 years. He spent the vast majority of his career working for Union Pacific Corporation, one of America's leading transportation companies, where he served as Chief Executive Officer for nine years and as Chairman of the Board of Directors for over ten years before retiring in 2007. Mr. Davidson is currently a member of the board of advisors of HCI Equity Partners, a private equity firm headquartered in Washington, D.C., and the board of Impala Asset Management, LLC, an investment fund headquartered in New Haven, Connecticut. He is a past member of the Horatio Alger Association of Distinguished Americans and previously served on the board of the Association of American Railroads, as chairman of the President's National Infrastructure Advisory Council, and as a director and trustee of the Malcolm Baldridge National Quality Awards Foundation. Mr. Davidson graduated from Washburn University in 1966 and has completed the Program for Management Development at Harvard University.
Mr. Hargis currently serves as the president of Oklahoma State University (OSU) and the OSU System, a comprehensive land-grant institution with 35,000 students and 7,400 employees. Prior to becoming the 18th president of OSU, Mr. Hargis was Vice Chairman of Bank of Oklahoma, N.A., and BOK Financial Corporation, a financial holding company based in Tulsa, Oklahoma, from 1997 to 2008. He currently serves as a director of both entities. Mr. Hargis distinguished himself as an attorney during the 28 years he practiced law, serving as president of the Oklahoma Bar Foundation and a fellow of the American Bar Foundation. He was honorably discharged from the United States Army in 1977 after serving for seven years. In addition to his juris doctorate from the University of Oklahoma, Mr. Hargis also holds a degree in accounting from OSU.
Mr. Davidson and Mr. Hargis, together with the entire Chesapeake Board, have been taking important actions to benefit our shareholders, and the Board remains focused on and committed to further serving the interests of shareholders in the years ahead.
I'm impressed, these guys have a couple of great resumes.
Here is the problem though. These aren't new directors. These are directors who have supposedly been serving Chesapeake shareholders for several years already. I went and had a read of the most recent Chesapeake proxy and it turns out that Mr. Davidson has been a director for six years and Mr. Hargis for three years.
I know in my line of work that when I do a performance review on an employee, he or she doesn't bring in his or her past work experience at prior jobs for me to review. I review that employee's performance at his or her current job over the past year. I don't care what the employee did before coming to work for me.
Likewise, I don't really care about the past work experience of these two director candidates so much as I care about their specific performance as Directors of Chesapeake Energy.
And I find that performance lacking.
Both Mr. Hargis and Mr. Davidson have served on Board's Audit Committee. According to the recent proxy filing the audit committee is responsible for:
- Oversight of the integrity of the Company's financial statements and disclosure
- Oversight of the Company's compliance with legal and regulatory requirements
- Oversight of the Company's internal audit function
- Appointment and oversight of the independent auditor
- Oversight of the Company's enterprise risk management ("ERM") program
- Oversight the Employee and Vendor Hotline for anonymous reporting of questionable activity
Basically these guys have been the head of the watchdog at Chesapeake Energy. These guys have had the task of setting the tone for creating ethical and shareholder friendly activity at Chesapeake Energy. These guys have been responsible for ensuring that Chesapeake uses good judgment. These guys have had the task of managing risk.
Consider their responsibilities and then consider that at Chesapeake:
- The CEO has been involved in a hedge fund that trades the very commodity that Chesapeake is one of the largest producers of
- The CEO amassed almost a billion dollars of personal debt on properties shared with Chesapeake and that debt was not disclosed to shareholders
- The company is under an informal investigation by the SEC for its CEO's Founders Well Program
- The company paid a ridiculous $12 million for an antique map collection and $75 million bonus to the CEO during the 2008 financial crisis when anyone with good judgment was conserving cash
Voting for or against these board members should have nothing to do with how impressive their resumes are and everything to do with the job that they have done representing shareholders as Chesapeake board members.
Personally, I think it is time that we start fresh and get some new directors in place that we know are going to be working in the best interests of shareholders, not the best interests of the CEO. We don't have to feel bad giving these directors the boot, they have been making half a million dollars a year and flying on private jets while working for us shareholders. They had a nice run.
It is time for change at Chesapeake.
Disclosure: I am long CHK.