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May 07, 2012
Chesapeake Energy Agrees to Separation of Chair and CEO
    by Robert Kropp

The controversial oil and gas company agrees to a key corporate governance reform after widespread criticism of an arrangement allowing CEO Aubrey McClendon to borrow more than a billion dollars from its treasury.

People may argue whether or not the world has entered an era of peak fossil fuel or other measures of resource depletion, but it is indisputable that the exploitation of finite resources in inherently unsustainable. That is why, E IRIS argues in a recent report, companies in the extractives sectors "need to refocus their business drastically in order to offset their negative impacts."

Chesapeake Energy is an oil and gas company whose corporate governance practices have often drawn concerned engagement from sustainable investors and other shareowner advocates. Last year, Harrington Investments divested its holdings in the company, citing consistent and flagrant violations of environmental standards as well as poor corporate governance as the primary reasons.

This year, the $113 billion New York City Pension Funds filed a shareowner resolution with Chesapeake Energy, requesting that the company permit long-term shareowners to include their own nominees for board director positions. And GovernanceMetrics International (GMI) identified the company as one of relatively few at risk of a failed say-on-pay vote in 2012.

Chesapeake's stock price plummeted last month when Reuters reported on a perk enjoyed by the company's Chairman and CEO, Aubrey McClendon. The Founder Well Participation Plan (FWPP) allowed McClendon to borrow more than one billion dollars from the company by "pledging his stake in the company's oil and natural gas wells as collateral," according to Reuters.

However, widespread coverage of the company's most recent governance failure—as well as the decline in its stock price—seems to have forced the company's board of directors to finally open up better lines of communication with its shareowners. The New York Times reported last week that Chesapeake has terminated its well ownership arrangement with McClendon, and that he "will receive no compensation of any kind" in return for the early termination.

Chesapeake also responded to shareowners concerns by agreeing to adopt the more sustainable governance position of separating the positions of Chairman and CEO at the company. In addition to more effective risk oversight, benefits that accrue to such a policy include ensuring that management is in close alignment with the interests of shareowners, mitigating concerns over conflicts of interest and maintaining regular communications with shareowners.

The resolution at Chesapeake was filed by the New York State Common Retirement Fund. In a statement, State Comptroller Thomas DiNapoli said, "This board has historically been slow to address shareholder concerns and it is unfortunate that it took a crisis of this magnitude and substantial loss of shareholder value to spur them to action."

"Much remains to be done to restore investor confidence in this company and we hope this is one of several steps Chesapeake's board will take to achieve that goal," DiNapoli continued.

In addition to progress on the governance front, Chesapeake also reached an agreement with shareowners on a proposal addressing the environmental and community impacts of hydraulic fracturing. Mark Regier of Everence Financial told last week that the proposal has been withdrawn.


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