Chesapeake Energy Corp. (NYSE:CHK), appeared before its shareholders at its annual meeting in June as a reincarnation of itself. After a year of responding to the fallout from the scandal involving unreported loans to former CEO and Chairman Aubrey McClendon, Chesapeake has a new CEO, almost an entirely new board of directors, and a rebounding stock price. Yet, despite this “new Chesapeake” – it was their shareholders who halted the company’s dramatic evolution in corporate governance by disregarding the recommendation of proxy advisory firms and affirming, in overwhelming fashion, the appointment of Thomas L. Ryan to the board of directors. It was a setback not only for Chesapeake, but for enhanced corporate governance at all publicly traded companies.
On paper, Mr. Ryan, the CEO of funeral-services provider Service Corp. International (NYSE:SCI), is a well-respected and talented executive who can add real value to Chesapeake. Yet, leading proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis & Co., advised shareholders to oppose his appointment out of concern over whether he could direct the appropriate attention to Chesapeake given his other director responsibilities. Mr. Ryan serves on four public company boards: Service Corp. International, Texas Industries, Inc. (NYSE:TXI), Weingarten Realty Investors (NYSE:WRI) and Chesapeake.
Actually, it’s not Mr. Ryan’s service on other public company boards to which these proxy advisory firms took exception. Rather it is that he does so as CEO of another public company. The ISS report opined that a CEO “cannot reasonably be expected to serve on more than two public boards at one time in addition to his or her full-time duties as chief executive.”
The reports from ISS and Glass Lewis, however, raise a broader issue for improved corporate governance – not just at Chesapeake, but also at a substantial number of public companies. How many boards are too many for a director? What we now have in the U.S. is a director population that serves on too many boards, which presents a substantial risk to the companies these directors represent. It is the result of a director search process that is all too often limited to existing public company officers and directors.
Fred Hassan, the non-executive chairman of Avon Products, recently made headlines when he suddenly stepped down from their board after just four months due to the intensification of his “other professional commitments”. Hassan also serves on the boards of Bausch & Lomb, Inc. and Time Warner, Inc. (NYSE:TWX), as well as being the managing director and partner at Warburg Pincus, LLC. Unfortunately, Hassan is an outlier. Whether driven by ego or the prospect of financial gain, most directors are reluctant to admit that they have taken on too much that they need to voluntarily step-down from, or refuse, a board appointment.
According to Spencer Stuart’s 2012 Board Index, the average number of board meetings for a public company each year is 8.3. That number, however, does not account for the substantial number of committee meetings, conference calls and document review and preparation in between these meetings.
Many boards now impose restrictions on additional corporate directorships. According to the Spencer Stuart Index, 74% of S&P 500 companies now limit, in some form or another, other corporate directorships for their board members. Yet a closer examination reveals that such self-imposed restrictions are fairly insignificant. Of those boards that adopt restrictions, 41% limit additional directorships to four boards. Given the demands on today’s directors, such a permissive limitation would seem to pose an unacceptable risk to both the director’s corporations and their shareholders.
This is why the vote by Chesapeake’s shareholders was such a missed opportunity. Preliminary voting results demonstrated an average affirmative vote of 96% for all of Chesapeake’s directors, including Mr. Ryan. If ever there was a company that was in a position to take a stand against excessive board service, it was Chesapeake. During the time period for which Chesapeake CEO Audrey McClendon was accruing in excess of $1 billion in undocumented loans from the company, more than half of Chesapeake’s board members served on 4 or more corporate boards. Although that number is down today, Chesapeake’s directors still hold an average of only 3.4 corporate directorships – well above the S&P average of 2.1.
Chesapeake is a company which can ill-afford to fall victim to past practices. For the sake of its shareholders, let’s hope Mr. Ryan turns out to be an exceptional director who continues the progress Chesapeake has made over the past year in terms of corporate governance improvements.