One of the conundrums in the corporate governance world is the difficulty in showing a relationship between good corporate governance and performance. Increasing the number of independent directors from a majority to a super majority, for example, does not typically result in better performance. There are many reasons for this, not the least of which is that "independent" directors are often not really independent so the benefit to the company is questionable.
But can bad governance result in a decline in share prices? If Chesapeake Energy is any indication, the answer is yes. The company has engaged in any number of governance practices that have raised eyebrows, from purchasing the CEO's map collection to supporting the legislation in Oklahoma that would mandate staggered boards.
The board is almost entirely lacking in diversity and until recently combined chairman and CEO. Directors are lavishly paid, with total compensation for most of them exceeding $500,000 in 2011 and perqs that include the personal use of the corporate aircraft. See Proxy Statement, at 10. Perhaps unsurprisingly, shareholder proposals calling for say on director pay have garnered considerable support (in 2010, the proposal received 192 million votes in favor; 222 million against; the proposal passed in 2009).
Concerns over governance, however, came to a head with the breaking of stories about loans by the CEO and outside investment activities. A Reuters report described the CEO's activities as running a hedge fund "that traded in the same commodities Chesapeake produces." Another report indicated that the CEO had "used his personal stake in Chesapeake wells as collateral for up to $1.1 billion in loans used mostly to pay his share of the costs of Chesapeake wells in which he had invested."
All of this suggests a board that has been passive with respect to the CEO and has displayed a tin ear when it comes to the governance interests of shareholders. So how has this been viewed in the market? Not favorably. Chesapeake share prices have taken a beating. While some of that is attributable to the failure to meet analyst expectations, the revelations about the CEO have played a role.
Adding an independent director or forming a risk committee of the board may not raise share prices. But suggestions that a board that does not pay sufficient attention to the activities of the CEO apparently does, at least if Chesapeake is any example.