The third feature Crooks highlights is the industry’s entrepreneurial nature, which has often led to dominant chief executives who command an unhealthy influence over their companies’ boards. Nowhere is this more evident than at Chesapeake Energy Corporation (NYSE:CHK), where a risk-taking oil and gas entrepreneur — Aubrey McClendon — built a fledgling natural gas start-up into one of the leading energy producers in the country.
Yet poor corporate governance and an unhealthy addiction to debt-fueled expansion, overseen by a timid and relenting board, proved to be Chesapeake Energy Corporation (NYSE:CHK)’s — and McClendon’s — undoing. After more than two decades at the company, McClendon departed as CEO on April 1, reportedly forced out by the company’s largest shareholders.
An eerily similar situation is playing out at SandRidge Energy Inc. (NYSE:SD), which, interestingly, is captained by a Chesapeake Energy Corporation (NYSE:CHK) co-founder, Tom Ward. As with Chesapeake Energy Corporation (NYSE:CHK), activist investors have pointed the blame at SandRidge Energy Inc. (NYSE:SD)’s CEO, as well as the rest of its management team and its board of directors, whose recklessness, they argue, has kept the company’s share price far below where it would be were a more disciplined management team to be installed.
Late last year, activist hedge funds TPG-Axon Capital Management and Mount Kellett Capital Management took aim at SandRidge Energy Inc. (NYSE:SD), highlighting numerous management- and board-related missteps in separate scathing letters.
TPG-Axon argued that SandRidge Energy Inc. (NYSE:SD)’s board failed to rein in the company’s excesses, allowing Ward to rake in tens of millions in annual compensation, while the company’s stock price plummeted roughly 80% since its IPO. The hedge fund’s argument has convinced many. SandRidge Energy Inc. (NYSE:SD) has since agreed to add four new directors nominated by TPG-Axon to its board, and Ward is expected to depart as CEO.
Shareholder activism: good or bad?
In many of these cases, shareholder activism that led to change was probably a good thing for company shareholders. After all, nobody invests in a company to let reckless CEOs squander their money, while using shady private dealings to amass vast fortunes for themselves. But the phenomenal rise of large activist shareholders may also have a downside.
Most importantly, it could stifle the innovation and dynamism that has characterized the American oil and gas industry. As John Kemp at Reuters has noted, it was companies like Chesapeake Energy Corporation (NYSE:CHK) — with risk-taking entrepreneurs at the helm — that pioneered the push into shale oil and gas plays. Had they instead focused on capital discipline and cost reduction, perhaps our domestic energy picture would have remained bleak.
The article Energy Companies and the Rise of Shareholder Activism originally appeared on Fool.com.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool owns shares of Transocean and has options on Chesapeake Energy.
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