After Shareholder Revolt, How Long Can Chesapeake’s CEO Hang On?

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Sean Gardner / Reuters

Chesapeake Energy CEO Aubrey McClendon.

Chesapeake Energy shareholders revolted against the energy giant’s management and board Friday, withholding support for the two directors up for re-election and voting down the compensation plan for the company’s top executives. The question now is whether billionaire CEO Aubrey McClendon can hang on to power at the nation’s second-largest natural gas producer, which faces persistent questions about its business strategy, $10 billion cash-crunch, and corporate governance oversight. There have been growing calls for McClendon’s ouster — including from prominent shareholders. McClendon still has supporters, and one influential company observer thinks the CEO should be given one more chance, but it’s very clear that his position has grown more tenuous. If there are further revelations about McClendon’s controversial financial dealings, he could be history.

Chesapeake shareholders delivered a resounding vote of disapproval to the company’s board during the meeting in Oklahoma City. One shareholder advocate called it a “high-watermark and one of the biggest protest votes ever registered at a U.S. annual meeting.” The two Chesapeake directors up for re-election, V. Burns Hargis and Richard K. Davidson, each garnered less than 30% of shareholder votes, prompting both men to offer to resign, something the company is considering. Hargis is president of Oklahoma State University and Davidson is a former chairman of Union Pacific, the largest railroad in the United States. In another key vote, only 20% of Chesapeake shareholders approved the company’s executive pay plan, but that result isn’t binding. “The vote is fundamentally a referendum on the entire board,” Michael Garland, head of corporate governance for New York City comptroller John Liu, who oversees a big block of Chesapeake shares, said at the meeting.

(More: Ahead of Annual Meeting, Chesapeake CEO Aubrey McClendon Lawyers Up)

Friday’s shareholder meeting was a another rebuke for billionaire CEO McClendon, who has hired a top former Securities and Exchange Commission lawyer to advise him on IRS and SEC inquiries into his controversial financial dealings, including revelations that he ran a secret $200 million hedge fund that traded natural gas at the same time he was CEO of the natural gas giant. He also received $1.3 billion in undisclosed personal loans over the last three years, secured by his stake in Chesapeake’s oil and gas wells. In response, Chesapeake’s board stripped McClendon of his role as chairman, and clipped the CEO’s controversial well-stake compensation plan.

But some top Chesapeake shareholders don’t think that goes far enough, and have called for McClendon’s removal as CEO. On Friday, David Dreman, whose Dreman Value Management firm owns about 1 million shares in Chesapeake, told CNBC that it’s time for McClendon to go. “When you see all the things that Aubrey McClendon has done in the past years in increasing numbers, I don’t think as talented as he is he should be a member of Chesapeake anymore,” Dreman said. “I think he should be — either resign or be fired by the reconstructed board.” Dreman’s comments came in the wake of a lengthy Reuters report on McClendon’s “lavish and leveraged life,” which detailed how the CEO uses company resources for his personal benefit, including a company jet to ferry family members on vacations to Paris, Amsterdam and Bermuda.

(More: Chesapeake Energy Bows to Raider Carl Icahn, Will Shake Up Board)

The Chesapeake shareholder revolt came despite company efforts to placate its critics, including activist investor Carl Icahn, the company’s second-largest shareholder, who is waging a campaign to reform its corporate governance practices. Last Monday, one week after Icahn called for a board shakeup, Chesapeake said it would replace four of its board members with new independent directors. Chesapeake also plans to sell its pipeline business for $4 billion, raising much-needed cash, in a move that sent company shares soaring 7% last week. The company’s share price was also boosted after closely-watched Argus Research analyst Phil Weiss, who has been very critical of the company, upgraded the stock from “Sell” to “Hold.”

For now, McClendon appears safe, although his position has eroded considerably in recent months. In a vote of confidence, Vincent Intrieri, who represented Icahn Capital at the meeting, called McClendon a “great oil and gas man,” but said that even great executives need vigilant oversight. As the IRS and SEC inquiries continue, shareholders will be watching closely for further damaging revelations about McClendon. If more questionable practices surface, or if the regulatory investigations escalate, McClendon may find that whatever shareholder goodwill he still retains could quickly evaporate.

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