Corporate Governance Issues at Chesapeake Energy: A Case Study

This case study examines the corporate governance failures of Chesapeake Energy Corporation. The analysis highlights issues such as insider selling of shares, non-compliance with the Sarbanes-Oxley Act, manipulation of director compensation, unethical practices, and accounting irregularities. ...Read More

Running Head: MANAGERIAL ACCOUNTING
MANAGERIAL ACCOUNTING
Name of the student
Name of the University
Author’s Note

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Table of Contents
Introduction...........................................................................................................................................2
Discussion.............................................................................................................................................2
Conclusion.............................................................................................................................................3

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Introduction
Corporate governance is a body of directors, chief executives, investors and shareholders and
other major participants of the company who play an important role in describing the corporate
structure of the company. Chesapeake Energy Corporation was on the leading manufacturer of coal in
US. This report aims at determining the various corporate governance issues that the company is
facing and its impacts. It also suggests action that can be taken by the shareholders at the time of
dissatisfaction.
Discussion
The company faced various issues in its corporate governance practices, which affected its share price
and profitability. Various corporate governance issues are as follow:
1. McClendon, founder and one of the primary shareholders of the company, sold the major part
of his shares in October, 2008 when the prices were falling, resulted to decrease in his
holdings from 17% to 5%. Selling these shares in bulk brought down the value of the share
price, which was bad for the company.
2. Chesapeake was unable to replace one of the original directors post retirement. The Sarbanes-
Oxley Act required audit committee members to be independent, however the company did
not adhere to the act. This made Mr Self step down form the committee. Losing an important
board member or Failing to replace the original director can slow down the firm’s decision
making abilities.
3. Compensation committee board members were supposed to get a fixed amount of fee and
stock option, which the company failed to provide. The company also manipulated the
directors’ compensation in 2005 and made its firm’s aircraft available to the directors for their
personal use, which was an unethical act. Ethic violation is one of the major issues of the
corporate governance, it affects the working of the company and might result in losing vital
employees of the company that contribute the most in the company’s profit.

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4. In December 2008 when the company purchased maps worth $12.1 million from its directors
and accounted it as a credit against costs incurred from participating in the FWPP.
Manipulating the accounts of the company can risk the success of the company and trust of its
employees.
5. The Company abandon its classified board structure and elected all board members annually.
There were various agendas brought up at the time of shareholder’s proposals with majority
votes, but did not affect the decision of the company. This is an inappropriate practice by the
company. Shareholders of the company have ownership rights and their decisions and
suggestions should be considered important otherwise the company may lose them and incur
major loss.
Consequences and Key learnings:
The investors are the major part of the company’s capital and revenue. Hence, making sure that
these investors are safeguarded and satisfied should be the major concern of the company. Investors
who are dissatisfied or unhappy with Chesapeake can first file feedback about their dissatisfaction
with the company’s governance. If proper measures are not taken, then the investors can claim back
the amount invested. This would create a very bad impression of the company and affect its future
investments and funding.
Key learnings from the case discussed is that the directors, investors and other board members
need to give more heed to the corporate governance practices of the organisation. The company
should work towards its financial operations so that the share prices do not fall and portrays a bad
picture of the company. Board composition is the key driver of corporate governance and it should
consist of people who play their roles right and ethically.
Conclusion
In a nutshell, it can be said that corporate governance of a company plays a crucial role in
smooth and ethical working of the company. Investors are the main reasons why the company is in the

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market and constantly expanding. Hence, Chesapeake Energy Corporation should have appropriate
policies in order to safeguard its investors and shareholders policies.