School

nd
2 Semester A.Y. 2022-2023

Written Case Analysis

Chesapeake Energy: All is Well?

Submitted by:
Me
(21-1049-607)
Bachelor of Science in
Accountancy – 2nd year

Submitted to:
You
Instructor

Date of Submission: May 08, 2023

 Table of Contents

I. Executive Summary..................................................................................................1
II. Background...............................................................................................................1
Oil and Gas Industry Overview......................................................................................1
Chesapeake Energy Origin or History...........................................................................3
Mr. Aubrey Kerr McClendon...........................................................................................3
III. Case Evaluation........................................................................................................4
Corporate Greed..............................................................................................................4
Chesapeake Energy Corporate Governance Challenges............................................5
Abridgment.......................................................................................................................6
IV. Proposed Solution for the Discussion Questions.................................................6
Discussion Questions.....................................................................................................6
V. Recommendation....................................................................................................11
VI. Conclusion...............................................................................................................12
VII. References...............................................................................................................12

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I. Executive Summary
Mr. Aubrey Kerr McClendon was able to prove a good reputation for himself by
successfully leading Chesapeake Energy as CEO to become the second-largest
natural gas producer in the United States of America (U.S.). However, beginning in
2008, his unusual and generous compensation package began attracting the attention
of shareholders as the company's financial performance was impacted by the
economic downturn. The Securities and Exchange Commission (SEC) launched a full-
scale inquiry against the corporation in response to allegations of extravagance,
misuse of corporate finances, and related-party transactions involving McClendon and
board members. Following that, shareholder activists led the charge to force
McClendon out of the company he founded. The goal of this case is to provide an
opportunity for debate on topics such as executive compensation, board independence,
conflicts of interest, and shareholder activism.

II. Background
Oil and Gas Industry Overview
The oil and gas industry originated in the mid-nineteenth century with the
demand for lamp oil. Whales provided oil for lamps at the time, but their numbers were
decreasing due to overfishing. Those in the Northeast United States who needed a new
supply of fuel learned that kerosene, a petroleum byproduct, could be produced by
exploiting the area's petroleum underground seepages. In Titusville, Pennsylvania, oil
was discovered in 1859 using an approach similar to the way wells extract water from
the ground. The first oil price increase began, although it was brief due to big advances
in technology.
Today the industry is composed of companies that extract hydrocarbon liquids
and natural gas from the earth. The industry is classified into three distinct segments,
with some firms choosing to specialize in one area while others operate in all three.
The oil and gas industry is a critical component of the global economy, providing the
primary sources of energy for transportation, heating, and electricity generation.

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The industry encompasses a broad range of activities, including exploration,

drilling, production, transportation, refining, and marketing of crude oil and natural gas.
Here is an overview of the oil and gas industry:
1. Exploration and Production:
 Exploration involves the search for new sources of oil and gas deposits beneath
the Earth's surface. This can involve the use of seismic surveys, drilling, and
other technologies to identify potential deposits.
 Production involves the extraction of oil and gas from the Earth's crust through
drilling and well operations. Once extracted, the oil and gas are transported to
refineries for processing.
2. Transportation and Refining:
 Transportation involves moving crude oil and natural gas from production sites
to refineries and other distribution centers. This can involve pipelines, tankers,
and other transportation modes.
 Refining involves the processing of crude oil into various products, including
gasoline, diesel, and other fuels. Refineries also produce other products, such
as lubricants and petrochemicals.
3. Marketing and Distribution:
 Marketing involves the sale and distribution of oil and gas products to
consumers and other buyers, including wholesalers and retailers.
 Distribution involves the delivery of products to end-users, such as gas stations,
homes, and businesses.
Environmental and Social Impacts:
The oil and gas industry can have significant environmental impacts, including
air and water pollution, habitat destruction, and greenhouse gas emissions. The
industry can also have social impacts, such as community displacement, conflicts over
land rights, and human rights abuses. Overall, the oil and gas industry plays a vital role
in the global economy, but it also faces significant challenges related to sustainability,
climate change, and the transition to renewable energy sources.

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Chesapeake Energy Origin or History

Chesapeake Energy Corporation is a company that has had a significant impact
on the American oil and natural gas industry. Founded in 1989 in Oklahoma City,
Oklahoma, by Aubrey McClendon and Tom Ward, Chesapeake Energy quickly became
a major player in the industry through a series of acquisitions and successful drilling
operations.
In the early 2000s, Chesapeake Energy became a leader in shale gas
production by pioneering hydraulic fracturing and horizontal drilling techniques in the
Barnett Shale in Texas. The company's success in shale gas production helped to
revolutionize the American energy industry and usher in a new era of domestic energy
production. However, Chesapeake Energy faced significant challenges in the years
leading up to its bankruptcy filing in 2020. The company's financial difficulties were
compounded by concerns over corporate governance, including the revelation of CEO
Aubrey McClendon's controversial compensation program and allegations of bid-
rigging.
Despite these challenges, Chesapeake Energy emerged from bankruptcy in
2021 with a renewed focus on profitability and sustainable practices. The company has
announced plans to reduce its carbon footprint and expand its presence in the
renewable energy sector, demonstrating a commitment to the transition to a more
sustainable energy future. Throughout its history, Chesapeake Energy has had a
significant impact on the American energy industry. The company's pioneering work in
shale gas production helped to drive domestic energy production and reduce America's
reliance on foreign sources of energy. Despite its challenges in recent years,
Chesapeake Energy remains a major player in the industry, and its continued success
will be critical to America's energy security and sustainability in the years to come.

Mr. Aubrey Kerr McClendon

Aubrey Kerr McClendon was an American businessman and entrepreneur who
co-founded Chesapeake Energy Corporation, a major oil and natural gas exploration
and production company. Born in Oklahoma City, Oklahoma in 1959, McClendon
attended Duke University and graduated with a degree in history before going on to
earn an MBA from the University of Oklahoma.

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In 1989, McClendon co-founded Chesapeake Energy with Tom Ward, and the
company quickly became a major player in the American energy industry. Under
McClendon's leadership, Chesapeake Energy pioneered hydraulic fracturing and
horizontal drilling techniques in the Barnett Shale in Texas, helping to revolutionize the
American energy industry and drive domestic energy production. McClendon was
known for his bold and controversial approach to business, and he often courted
controversy in his personal life as well. In 2016, McClendon was indicted on charges of
conspiring to rig bids for oil and natural gas leases in Oklahoma, but he denied any
wrongdoing.
Tragically, McClendon died in a car crash in Oklahoma City in 2016, just one
day after being indicted on the bid-rigging charges. Despite the controversies
surrounding his personal and professional life, McClendon was widely regarded as a
visionary leader in the American energy industry, and his legacy continues to shape the
industry to this day.

III. Case Evaluation

Corporate Greed
Corporate greed is a term used to describe the excessive focus on profits and
financial gain at the expense of ethical and social responsibilities. This behavior can be
seen in some corporations where executives prioritize their own personal financial gain
over the long-term interests of the company and its stakeholders.
Corporate greed can manifest itself in a number of ways, including fraudulent
financial reporting, insider trading, and excessive executive compensation. When
corporate leaders prioritize their own financial gain above all else, it can lead to
unethical behavior, including environmental destruction, labor exploitation, and
consumer harm. Corporate greed can have serious negative consequences, both for
the companies themselves and for society as a whole. Companies that prioritize profits
over ethical behavior may experience reputational damage, legal liability, and financial
losses in the long run. At the same time, society as a whole may suffer from the
negative externalities associated with corporate greed, including environmental
damage, income inequality, and social unrest.

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It is important for companies to prioritize ethical behavior and social

responsibility in order to build long-term, sustainable value for all stakeholders. This
includes taking into account the interests of employees, customers, suppliers,
communities, and the environment, in addition to financial considerations. By doing so,
companies can create value for all stakeholders and contribute to a more sustainable
and equitable future.

Chesapeake Energy Corporate Governance Challenges

Chesapeake Energy Corporation faced significant corporate governance
challenges in the years leading up to its bankruptcy filing in 2020. These challenges
included concerns over the company's financial management, executive compensation
practices, and allegations of bid-rigging.
One of the primary concerns regarding Chesapeake Energy's corporate
governance was the company's financial management. The company had a significant
amount of debt and was struggling to generate sufficient cash flow to cover its
operating expenses and debt service obligations. This led to concerns over the
company's long-term financial viability and the potential for a bankruptcy filing. Another
major issue for Chesapeake Energy was its executive compensation practices. CEO
Aubrey McClendon was known for his controversial compensation program, which
included the use of personal loans to finance his ownership stake in the company. This
practice raised concerns over potential conflicts of interest and the alignment of
executive compensation with long-term shareholder value. In addition to these issues,
Chesapeake Energy also faced allegations of bid-rigging in connection with the
purchase of oil and gas leases in Oklahoma. The company was accused of conspiring
with other energy companies to keep lease prices artificially low, which raised concerns
over potential antitrust violations and unethical business practices.
These corporate governance challenges ultimately contributed to Chesapeake
Energy's bankruptcy filing in 2020. However, the company emerged from bankruptcy in
2021 with a renewed focus on sustainability and corporate responsibility. This includes
a commitment to reducing its carbon footprint and expanding its presence in the

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renewable energy sector, demonstrating a commitment to ethical and sustainable

business practices.

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Abridgment
To outline the case, Aubrey Kerr McClendon engaged in several unethical
behaviors, including conflicts of interest, misuse of company resources, bid-rigging, and
failure to disclose personal loans, which violated corporate governance principles,
harmed shareholder value, and damaged Chesapeake Energy's reputation.
One of McClendon's unethical behaviors was his practice of using a
controversial compensation program that allowed him to personally invest in
Chesapeake Energy's wells alongside the company, which created a conflict of interest
and eroded shareholder value. Additionally, he allegedly used company resources to
fund his personal investments and engaged in questionable business deals that
enriched himself and his associates at the expense of the company. McClendon also
faced allegations of bid-rigging and collusion with other energy companies to keep the
price of drilling rights low, which violated antitrust laws and harmed landowners who
were selling their mineral rights. Moreover, he failed to disclose to investors his
personal loans that were secured by his stakes in Chesapeake wells, which raised
concerns about conflicts of interest and transparency.

IV. Proposed Solution for the Discussion Questions

Discussion Questions
1. How can executive compensation schemes aid in ensuring good corporate
governance? Discuss the trade-offs involved and how they could have applied to
Chesapeake. (You can examine the unique nature of a founder-company)
Executive compensation schemes can play a significant role in promoting good
corporate governance by aligning the interests of executives with those of the company
and its shareholders. When executives are incentivized to prioritize long-term value
creation over short-term gains, they are more likely to make strategic decisions that
benefit the company in the long run. Additionally, transparent and well-structured
compensation schemes can help prevent conflicts of interest and encourage ethical
behavior among executives. By ensuring that executives are compensated fairly and in
line with their performance, companies can attract and retain top talent, while also
promoting accountability and transparency in decision-making.

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Chesapeake is a company that faced numerous trade-offs in its operations,

which ultimately affected its performance and profitability. One of the primary trade-offs
was between exploration costs and production costs. Exploration costs are necessary
to identify new reserves and maintain production levels, while production costs are
associated with extracting and refining oil and gas from existing reserves.
Chesapeake faced the challenge of balancing these costs, and it was often forced to
make trade-offs between investing in exploration or production. For example, in the
early 2000s, the company focused primarily on exploration and rapidly expanded its
business by acquiring new leases and drilling in new areas. This strategy was
successful in finding new reserves, but it also led to a high level of debt, which
ultimately impacted the company's profitability.
Another trade-off Chesapeake faced was between short-term profitability and
long-term sustainability. The company often pursued short-term gains by increasing
production and selling assets, but this came at the cost of long-term sustainability.
Chesapeake's heavy reliance on natural gas, for instance, left it vulnerable to
fluctuations in market prices, making it difficult for the company to maintain a stable
financial position. Overall, Chesapeake's trade-offs highlight the importance of
balancing short-term and long-term objectives, as well as the need to prioritize
investments in

2. How can board independence play a part in strengthening corporate governance at

Chesapeake?
Board independence is an important aspect of corporate governance at
Chesapeake. Independent directors are not affiliated with the company or its
management, and this helps to ensure that there is an appropriate level of oversight
and accountability. By having independent directors on the board, there is a greater
likelihood that decisions will be made in the best interest of the company and its
stakeholders, rather than for personal gain or other reasons.
One of the key benefits of independent directors is that they can provide objective
perspectives and challenge management when necessary. This helps to ensure that
the board is acting in the best interests of the company and its stakeholders.

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Additionally, independent directors can help to improve transparency and accountability

by providing oversight and monitoring of management's activities.
Overall, board independence is critical to ensuring that Chesapeake operates in
an ethical and responsible manner, and that the interests of all stakeholders are taken
into consideration.

3. Discuss how the different conflicts of interests could be detrimental to stakeholders’

interests in Chesapeake. Suggest ways to mitigate these conflicts of interests.
Chesapeake Energy, like any company, has various stakeholders with different
interests, and it's important to manage conflicts of interest to ensure that all parties are
satisfied and have their needs met. Conflicts of interest can arise when stakeholders
have competing interests or when individuals or groups within the company prioritize
their own interests over those of the stakeholders.
For example, Chesapeake's shareholders may want the company to focus on
increasing profits and returns, while environmental groups may want the company to
prioritize sustainability and reducing carbon emissions. Oil and gas workers may want
job security and higher wages, while local communities may be concerned about the
environmental impact of Chesapeake's activities.
To mitigate these conflicts of interest, Chesapeake could implement various
strategies. One approach could be to establish clear policies and procedures for
decision-making that take into account the interests of all stakeholders. For example,
the company could adopt an environmental policy that outlines its commitment to
reducing its carbon footprint, and establish goals and metrics to measure progress
towards those goals. Another approach could be to engage with stakeholders directly
and involve them in the decision-making process. This could include holding public
hearings or meetings with local communities and environmental groups to gather input
and feedback on the company's activities.

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4. Carl Icahn, along with other large shareholders, exerted pressure on the board to
replace directors in 2012 and succeeded. Evaluate the pros and cons of shareholder
activism in improving corporate governance and how it can protect the interests of
various stakeholders.
Shareholder activism can be a powerful force in improving corporate governance and
protecting the interests of stakeholders.
 Some potential advantages of shareholder activism include:
a) Increased transparency: When shareholders push for changes, companies are
often forced to disclose more information about their operations, financials, and
decision-making processes. This can help promote accountability and prevent
unethical or illegal behavior.
b) Improved board quality: Activist shareholders may push for board members who
have more expertise, experience, or independence. This can lead to more
effective oversight and better decision-making.
c) Increased shareholder value: Depending on the nature of the activism,
shareholder pressure can sometimes lead to better financial performance and
returns for investors.
 However, there are also potential downsides to shareholder activism:
a) Short-term focus: Activist shareholders may prioritize short-term gains over long-
term sustainability, which can hurt the company and stakeholders in the long
run.
b) Disruption: Activism can be disruptive to a company's operations and create
uncertainty for employees, customers, and other stakeholders.
c) Minority interests: Activist shareholders may represent only a small fraction of
the company's overall ownership, which can lead to conflicts with other
shareholders and a lack of broader support for their proposals.
Overall, shareholder activism can be an effective tool for promoting good corporate
governance.

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5. Moving forward, suggest other possible actions that Chesapeake can adopt to improve
corporate governance and re-instill investor confidence in Chesapeake.
Sure, here are some other possible actions that Chesapeake could consider to improve
corporate governance and investor confidence:
1. Establish a board committee on corporate governance: The committee would be
responsible for ensuring that the company's policies and practices meet the
highest standards of corporate governance.
2. Enhance financial disclosure: Chesapeake could consider increasing
transparency around its financial reporting, including providing more detailed
information on executive compensation, major contracts, and other key financial
metrics.
3. Re-evaluate executive compensation: Chesapeake could review and potentially
revise its executive compensation policies to better align executive pay with
company performance and shareholder interests.
4. Increase board diversity: Chesapeake could take steps to increase diversity on
its board of directors, including appointing more women and underrepresented
minorities.
5. Strengthen whistleblower protections: Chesapeake could establish stronger
protections for employees who raise concerns about potential wrongdoing or
ethical lapses within the company.
These are just a few ideas, but there are many other strategies that Chesapeake could
pursue to improve corporate governance and rebuild investor confidence.

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V. Recommendation
Chesapeake Energy Corporation, like many other companies, faces corporate
governance challenges that can undermine its long-term success and stakeholder trust.
Here are some recommendations on how to solve the corporate governance issues at
Chesapeake Energy:
The board of directors is responsible for overseeing the management of the
company and protecting the interests of shareholders. Chesapeake Energy should
strengthen its board by appointing independent directors who are not affiliated with the
company or its executives. These directors should be experienced, have relevant
industry knowledge, and possess a strong commitment to the principles of good
corporate governance.
Transparency is critical in promoting accountability and ensuring that
stakeholders have access to accurate and timely information about the company's
operations, financial performance, and governance. Chesapeake Energy should
enhance its transparency by regularly disclosing relevant information to its
shareholders, including financial statements, audit reports, and executive
compensation.
Effective risk management processes are critical in identifying and addressing
risks that can affect the company's performance and reputation. Chesapeake Energy
should establish and implement effective risk management processes that are aligned
with its strategic goals and objectives. This includes identifying potential risks,
assessing their likelihood and impact, developing appropriate risk mitigation strategies,
and monitoring and reporting on risk management activities.
Executive compensation should be linked to the company's performance to
promote accountability and align executive interests with those of the company's
shareholders. Chesapeake Energy should review and revise its executive
compensation policies and practices to ensure that they are aligned with the company's
strategic goals and objectives, and that they promote long-term value creation for
shareholders.
A culture of ethical behavior is critical in promoting good corporate governance
and maintaining stakeholder trust. Chesapeake Energy should establish and promote a
culture of ethical behavior that is aligned with its values and principles. This includes

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providing ethics training to employees, establishing channels for reporting unethical

behavior, and enforcing ethical standards through appropriate disciplinary action.
VI. Conclusion
I therefore conclude that following the governance issues at Chesapeake Energy,
the company has taken steps to address the concerns and improve its governance
practices. The company has made progress in areas such as executive compensation,
board independence, and financial transparency.
Chesapeake Energy has implemented changes to its executive compensation
policies, including reducing the use of stock options and tying executive compensation
to performance metrics that align with shareholder interests. The company has also
strengthened its board of directors with more independent members and made efforts
to improve financial transparency and reporting.
In addition, the company has made commitments to address environmental
concerns and has implemented measures to reduce its carbon footprint and promote
sustainability. Overall, while Chesapeake Energy has faced significant governance
challenges in the past, the company has taken steps to address these concerns and
improve its governance practices. The lessons learned from these challenges have
emphasized the importance of transparency, accountability, and responsible
management in the corporate world. As Chesapeake Energy continues to improve its
governance practices, it can position itself for long-term success in the energy industry.

VII. References
Zhixin, L., Kun, W., & Jingyao, L. (2021, February). Analysis of Reasons for US
Chesapeake Energy Corporation’s Bankruptcy and Restructuring. In Oil Forum (Vol.
39, No. 6, p. 62).

Healy, P. M., Rose, C. S., & Sesia, A. (2012). Aubrey McClendon's Special Incentive
Compensation at Chesapeake Energy (A). Harvard Business School Accounting &
Management Unit Case, (110-047).

Lane, B., & Moriarity, S. (2016). Chesapeake Energy Corporation. Accounting

Perspectives, 15(3), 213-223.

Goodrich, J., Ejiasa, N. U., Penner, T., Suglia, J. S., Zamarripa, D., & Bertsch, A.
(2017). A Culture of Greed at Chesapeake Energy. Journal of Applied Business and

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Economics, 19(4), 37-53.

Wertz, Joe. (2012, June 7). Reuters: CEO McClendon Used Chesapeake to Build a

‘Lavish and Leveraged’ Lifestyle. State Impact. Retrieved from: http://stateimpact.

npr.org/oklahoma/2012/06/07/reuters-ceo-mcclendon-used-chesapeake-to-build-a-
lavish-and-leveraged-lifestyle/

Marks, Jay. (2013, March 1). Chesapeake Energy facing formal SEC investigation.
NewsOK. Retrieved from: http://newsok.com/chesapeake-energy-facing-formal-sec-
investigation/article/3760200

Scheyder, Ernest, & Grow, Brian. (2012, April 26). SEC starts probe of Chesapeake
CEO’s well stakes. Reuters. Retrieved from: http://www.reuters.com/
article/2012/04/26/us-chesapeake-idUSBRE83P0PX20120426

Driver, Anna, & Grow, Brian. (2012, April 18). Special Report: Chesapeake CEO took
$1.1 billion in shrouded personal loans. Reuters. Op. cit.

Helman, Christopher. (2012, May 25). Carl Icahn’s Letter To Chesapeake Energy.
Forbes. Retrieved from: http://www.forbes.com/sites/christopherhelman/2012/05/25/
carl-icahns-letter-to-chesapeake-energy/

Goodell, Jeff. (2012, March 1). The Big Fracking Bubble: The Scam Behind Aubrey

McClendon’s Gas Boom. Rolling Stone. Retrieved from: http://www.rollingstone.com/

politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301

Le, Phuong Cat. (2006, July 19). Buyers’ deep roots suggest they’ll lean toward
moving Sonics, Storm. Seattle PI. Retrieved from: http://www.seattlepi.com/news/
article/Buyers-deep-roots-suggest-they-ll-lean-toward-1209251.php

Gold, Russell. (2012, May 1). Chesapeake Board Crimps CEO’s Power. The Wall
Street Journal Retrieved from: http://online.wsj.com/article/SB100014240527023040
50304577377781801653726.html

Palmeri, Christopher. (2009, April 29). Chesapeake Energy Battles CEO Compensation
Furor. BloombergBusinessweek. Retrieved from: http://www.businessweek.com/
bwdaily/dnflash/content/apr2009/db20090428_012209.htm

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Chesapeake Energy Corporation. (2009). CHK DEF 14A. Chesapeake

Energy Corporation. Retrieved from: http://www.sec.gov/Archives/edgar/
data/895126/000119312509093692/ddef14a.html

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