Chesapeake Energy may need to sacrifice more than assets. The embattled U.S. gas producer is already dispensing with energy fields to raise cash. Now investors, including New York's state pension fund and the uppity Carl Icahn, want directors ousted. Replacing the two up for election without Chesapeake's co-operation is near impossible. But resistance is also counterproductive at this stage.
The letter from the custodian of the retirement fund for New York workers packs a punch. Thomas DiNapoli, the state comptroller, claims to have been let down by the board. Burns Hargis, a director since 2008, heads up the firm's audit committee, which failed to check a series of governance abuses, including allowing chief executive Aubrey McClendon to run a private hedge fund out of the firm's offices. Richard Davidson, who also serves on the audit committee as well as the company's compensation committee, shares in the blame.
The New York fund and its tiddly 0.25-per-cent stake in Chesapeake might have been easily brushed aside. But the presence of Mr. Icahn, who recently acquired a more influential 7.6-per-cent stake, and who wants four new directors, will be harder to dismiss, especially given his more aggressive stance in this second tilt of his at the company.
Removing Mr. Hargis and Mr. Davidson by force won't be easy. Chesapeake's outmoded electoral system means each needs just one vote to secure another term. The firm belatedly agreed to change this system after almost 80 per cent of shareholders demanded majority voting in 2009. This will come too late to dislodge the two men facing a vote next week. Mr. McClendon, in any case, has supported the pair, commending them in a recent letter to shareholders for "taking important actions to benefit our shareholders."
But Chesapeake is increasingly vulnerable. It was forced to borrow money at an exorbitant rate from Goldman Sachs in a clear sign of distress. And after losing nearly half its market value over the past year, Chesapeake can ill afford to further stoke the ire of shareholders. Bowing to investor demands for fresh blood on the board would be a better signal than previous governance sops that Chesapeake is taking investor concerns more seriously.