Just two years ago, Chesapeake Energy helped write a state law mandating staggered terms for the board members of large publicly traded Oklahoma companies.
This week, the Oklahoma City-based natural gas giant said it would seek “relief” from the very same law, which was designed to help prevent what’s essentially happening now at Chesapeake: a takeover of its corporate board.
The state law is one of many issues lingering in the background of what is likely to be a contentious annual meeting of Chesapeake’s shareholders today in Oklahoma City. StateImpact Oklahoma will be live-blogging that event here beginning at 10 a.m. CDT.
The law requires companies incorporated in Oklahoma to have what’s known as a “classified” board structure. That means board members are divided into classes with staggered elections so that only one-third of the members face a vote of shareholders each year.
Such classified structures make companies less vulnerable to board takeovers, a threat Chesapeake now faces.
After weeks of headlines questioning the company’s entangled financial relationship with its CEO Aubrey McClendon, Chesapeake this week bowed to the demands of its two largest shareholders, which now include billionaire corporate raider Carl Icahn. The activist investor and Southeastern Asset Management will name four new Chesapeake board members, the company said Monday.
Chesapeake’s preferred board structure, the type that became enshrined in Oklahoma law, used to be popular in the world of corporate governance. Not anymore.
“The trend has been away from classified boards and toward holding annual elections,” says Melissa Aguilar, a research associate in the corporate leadership department at The Conference Board, an independent and nonprofit business research organization.
A popular and effective shield to hostile takeovers, classified boards were adopted by many companies in the 1980s — usually with shareholder approval, according to a December 2011 report by Aguilar and The Conference Board.
Things changed dramatically after the Internet and telecom bubbles burst in 2000, and the tide of corporate governance shifted towards empowering shareholders. Misconduct at companies such as Enron and WorldCom hastened the change, according to the report.
About 60 percent of publicly traded companies had classified boards in 2002. By 2011, that number fell to less than half, according to the report. Less than one-third of Chesapeake’s peers in the S&P 500 peers have classified boards.
“Corporate governance experts believe one-year board terms give shareholders more power and more accountability,” Aguilar says. “It’s easier for them to replace the majority of the directors.”
Whether ‘Friendly or Unsolicited’
Chesapeake helped write the Oklahoma measure, which former Gov. Brad Henry signed into law in June 2010. The legislation, Senate Bill 1132, was a small part of a much larger bill overhauling Oklahoma’s statutes on limited partnerships.
The law received overwhelming support in the state House and Senate, and its passage was praised by the State Chamber of Oklahoma for ensuring “continuity of leadership” and “orderly transitions” at Oklahoma public companies.
“For a state like Oklahoma, where most of our public companies have been established by local entrepreneurs, the new law gives Oklahoma companies and their boards more say in the event of an acquisition or business combination, no matter if it is friendly or unsolicited,” chamber president and CEO Fred Morgan wrote in a December 2010 editorial.
The board law was amended in 2011 after complaints from ONEOK and OGE Energy. ONEOK had already declassified its board in 2008 and didn’t know about the new law until a Wall Street Journal reporter reached out for comment.
“We continue to believe that your decision as a shareholder to have an annual election of directors is consistent with best practices in corporate governance,” the company’s CEO wrote in a June 2011 letter to shareholders. “We also believe that corporations should be able to work with their shareholders to determine which type board is appropriate.”
ONEOK complained to Gov. Mary Fallin, who signed House Bill 2658. That law, authored by state Rep. Fred Jordan, R-Jenks, amended the previous one to grandfather in companies such as ONEOK so that they could keep their declassified board structure.
We were trying to give the companies some flexibility to either have a yearly election or a staggered election with some of the board members,” Jordan tells StateImpact. “[OGE and ONEOK] just wanted to be able to do it the way they’d done it for years.”
Chesapeake wouldn’t comment on its plans to secure relief from the law, which is effective until 2015.
“The Board will also seek relief from the Oklahoma statute mandating classified boards of directors for certain Oklahoma incorporated public companies so that shareholders will have the opportunity to elect the entire board of directors at the 2013 Annual Meeting of Shareholders,” the company wrote in a press release.
A Fallin spokesman, Alex Weintz, says such a move would require legislative action — which won’t happen until the next legislative session in February 2013.
“Governor Fallin has not been contacted by Chesapeake officials regarding a request for relief from this statute,” he said in an emailed statement. “If the Legislature does act to send a bill to Governor Fallin’s desk, she would give it due consideration.”
Rep. Jordan says he hasn’t heard any talk of such legislation. Neither has House Speaker Kris Steele, R-Shawnee, his representatives tell StateImpact.
While most corporate bylaws and state laws have moved in the direction of annual board member elections, Oklahoma statute doesn’t stand alone. Indiana and Iowa have adopted similar laws designed to help companies in their respective states fend off hostile takeovers, according to The Conference Board report.
Pressured in the Past
Chesapeake has a history of resisting calls to install single-year board terms.
In advisory votes in 2008 and 2009, a majority of the company’s shareholders backed a proposal calling for annual elections of directors, the WSJ’s Daniel Gilbert reported last year.
And that makes Chesapeake’s about-face all the more interesting, says corporate governance researcher Aguilar.
“They’ve been under fire from their shareholders for ignoring shareholder concerns, they’ve been criticized over their CEO pay, they’re facing a few resolutions at their annual meeting,” Aguilar says. “Perhaps this change is one they feel that they can make to appease shareholders.”