FILE - In this Friday, Nov. 18, 2011 file photo, Oklahoma State University president Burns Hargis speaks during a news conference in Stillwater, Okla. Chesapeake Energy Corp. shareholders showed their displeasure with the company's board by withholding support for two directors up for re-election at Friday's annual meeting. Both directors have tendered their resignation. Hargis is one of the two directors who resigned Friday. (AP Photo/Sue Ogrocki, File)
FILE - In this Friday, Nov. 18, 2011 file photo, Oklahoma State University president Burns Hargis speaks during a news conference in Stillwater, Okla. Chesapeake Energy Corp. shareholders showed their displeasure with the company's board by withholding support for two directors up for re-election at Friday's annual meeting. Both directors have tendered their resignation. Hargis is one of the two directors who resigned Friday. (AP Photo/Sue Ogrocki, File)
In this Wednesday, June 6, 2012 photo, Aubrey McClendon, CEO of Chesapeake Energy Corp., is pictured during the second half of Game 6 in the NBA basketball Western Conference finals, in Oklahoma City. Chesapeake's annual meeting is scheduled for Friday, June 8, 2012. Reports about McClendon's personal business dealings sparked a drop in the company's shares in April and led to charges of insufficient oversight by the board of directors. (AP Photo/Sue Ogrocki)
FILE- In this Sunday, Feb. 19, 2012, file photo, Aubrey McClendon, CEO and chairman of the board of Chesapeake Energy Corp., watches the Oklahoma City Thunder play the Denver Nuggets during an NBA basketball game in Oklahoma City. Chesapeake's annual meeting is scheduled for Friday, June 8, 2012. Reports about McClendon's personal business dealings sparked a drop in the company's shares in April and led to charges of insufficient oversight by the board of directors. (AP Photo/Sue Ogrocki, File)
Flowers grow in front of a sign at the Chesapeake campus in Oklahoma City, Friday, June 8, 2012. Chesapeake Energy Corp. shareholders showed their displeasure with the company's board by withholding support for two directors up for re-election at Friday's annual meeting. Both directors have tendered their resignation. Shareholders also withheld their support for CEO Aubrey McClendon and asked him questions about the corporate governance and accountability of the nation?s second largest producer of natural gas. (AP Photo/Sue Ogrocki)
A sign stands in front of the Chesapeake Energy Corp. campus in Oklahoma City, Friday, June 8, 2012, where the annual shareholders meeting is taking place. Chesapeake Energy Corp. shareholders showed their displeasure with the company's board by withholding support for two directors up for re-election at Friday's annual meeting. Both directors have tendered their resignation. Shareholders also withheld their support for CEO Aubrey McClendon and asked him questions about the corporate governance and accountability of the nation?s second largest producer of natural gas. (AP Photo/Sue Ogrocki)
OKLAHOMA CITY (AP) ? Chesapeake Energy Corp. shareholders rebuked the company's board by withholding support for two directors up for re-election at Friday's annual meeting. Both directors have tendered their resignation.
Shareholders also withheld their support for Chesapeake's executive compensation plan and peppered CEO Aubrey McClendon with questions about the corporate governance and accountability of the nation's second largest producer of natural gas.
Shares of the Oklahoma City-based company are worth nearly 40 percent less than a year ago. And Chesapeake still has big spending plans even though it's taking in less cash because of a plunge in natural gas prices. It also needs to sell off billions of dollars in assets to service a huge debt load.
"Something is out-of-balance here at Chesapeake," said shareholder Gerald Armstrong of Denver, whose proposal to reincorporate the company in Delaware passed with the support of 53 percent of the votes cast. Armstrong said the move would bring greater accountability to the company but that Chesapeake had resisted it. The proposal is nonbinding.
Armstrong said he filed his proposal in January before media reports raised questions about whether McClendon's personal business interests were in conflict with those of the company he runs. The reports helped sink an already depressed stock price. They also painted a picture of a board that accepted better-than-average pay and perks in return for keeping a loose rein on the CEO.
The reports disclosed that McClendon was allowed to borrow money from a company that Chesapeake was doing business with. Shareholders began calling for a shake-up of the board after Chesapeake acknowledged that directors hadn't fully scrutinized the loans' details.
"The absence of good government practices has become more apparent," Armstrong said. "Accountability is what it's all about and it's time for a change."
Change, at least in the make-up of the board, is coming. Chesapeake has agreed with activist investor Carl Icahn and Southeastern Asset Management, its largest shareholder, to replace four of nine board members with directors they choose. The company also stripped McClendon of the chairman title and plans to name a new independent board chairman by June 22.
The two directors who resigned Friday are V. Burns Hargis and Richard K. Davidson.
A representative of Icahn Capital, Vincent J. Intrieri, said the organization is demanding better corporate governance. Intrieri said McClendon is a great oil and gas executive but that even the best of executives need a strong board of directors to oversee their decisions.
McClendon and his company have been at the forefront of a boom in U.S. natural gas production. Just a few years ago it appeared the U.S. was running out of natural gas. Now the supply is so abundant that prices have dropped to levels last seen 10 years ago.
That plunge has left Chesapeake short on cash to service the large amount of debt it accumulated while buying up land for drilling. To fill the gap, Chesapeake plans to sell as much as $14 billion of assets in 2012.
On Friday, Chesapeake said it would sell its pipeline assets in three deals totaling $4 billion. That will bring asset sales so far this year to $6.6 billion. Biju Perincheril, an analyst at Jeffries & Company, said Chesapeake is now close to the $7 billion worth of asset sales he estimates it needs to avoid violating the terms of some of its loans.
"We don't intend to kick the can down the road. We intend to crush the can," McClendon said. "We can sell billions of dollars of assets."
In spite of low gas prices, the embattled CEO painted a bright future for the company he co-founded in 1989. McClendon said Chesapeake is responsible for 25 percent of the growth in natural gas production in the U.S. in the past five years and that the company has invested in commercial natural gas refueling stations it believes will enhance demand for the fuel.
"I'm very proud of the efforts that our company has made to provide leadership in this area," he said. "It's all about delivering value to shareholders."
Shares rose 2.8 percent Friday to $18.35 and gained 18 percent this week as analysts and investors welcomed the shake-up of the board. The shares are still down more than 17 percent for the year.
McClendon predicted that natural gas prices will eventually rebound from the current price of about $2.30 per 1,000 cubic feet but that the company will shift its focus to the production of natural gas liquids this year to boost its bottom line.
"The company trades at a great discount to the value of its assets," he said.
Investors may not be that patient.
Michael Garland, executive director of corporate governance for New York City Comptroller John C. Liu, said members of Chesapeake's board have been unresponsive to shareholder concerns and that plans to replace four board members sets the stage for an overhaul "that is long overdue."
"The board is under intense scrutiny," Garland said. "The new directors must act swiftly and purposefully."
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