Shareholder democracy is for the most part a very training-wheels sort of democracy. If you don’t like the directors of your company, you can vote against them, but you can’t vote for anyone else: if you want to nominate someone new, you generally have to run an expensive and time-consuming proxy contest, which for the most part is only a good idea if you’re somebody who’s in the business of running proxy contests. Absent that, voting against a director has the effect more of a tantrum than of an actual vote, since the general rule is that the candidate who gets the most votes wins, and if there’s only one candidate and there’s one vote for him and one hundred million against, he wins.

Richard Davidson and V. Burns Hargis must feel like winners today, since they got more votes than the next guy at the Chesapeake Energy annual meeting and so were re-elected as directors. Sadly, their celebration will be short-lived, because (1) Chesapeake also adopted a “majority voting bylaw” that provides that directors who get more votes against than for have to submit their resignations to the rest of the board, (2) three-quarters of shares that voted, voted against them, and (3) the board “will review their resignations in due course” but seems inclined to accept them in the coming “weeks, not months.”

Actually, for a full taste of democracy in action, here’s a rundown of the votes today:

I’ve highlighted in yellow the places where the board wanted one thing and the shareholders wanted the other thing. It is safe to say that, outside of boring stuff like ratifying the auditors, the board and the shareholders do not see eye to eye. When Citi’s shareholders rejected Vikram Pandit’s $15mm comp package in April, that sparked some introspection and rethinking of his pay. When CHK’s shareholders rejected Aubrey’s $17.9mm pay package, it didn’t rate a mention in the Bloomberg article about the vote, or in the company’s “we’ll take it under advisement” boilerplate press release.

Of course that’s because there has been some unpleasantness at Chesapeake, which has led to investor dissatisfaction that cannot be addressed just by trimming comp, so more extreme measures have been taken. Specifically:

Half of the board’s eight non-executive directors are scheduled to be replaced by June 22 under an agreement announced this week with Southeastern Asset Management and Carl Icahn, which together control more than 20 percent of Chesapeake’s common stock. Icahn will appoint one of the new directors and Memphis-based Southeastern the other three. The chairman also will be announced in that time.

Is that not weird? I mean, not unusual, but still weird. Southeastern and Icahn own 13.9% and 7.6% of CHK, respectively, yet they got to pick four of the nine directors (eight non-execs plus Aubrey). They do that picking without any shareholder vote – CHK’s bylaws, like most companies’, allow the board to fill its own vacancies between elections, so all they have to do is agree to have four of them resign and the rest elect the Southeastern and Icahn nominees.

Among the other board-disapproved, shareholder-approved proposals in the proxy was one to let shareholders nominate directors to the board using the company’s proxy. If that provision were in place already, Southeastern and Icahn could have nominated their directors publicly and had shareholders vote on whether they were better or worse than the current guys.* Since it wasn’t (and won’t be – the proposal is not binding on the board and they seem verrrrry unlikely to implement it), and since frankly negotiating for direct appointment of your candidates is more fun / better bang for the buck, they got their directors on the board the old-fashioned way: through negotiations with incumbent management that other shareholders were not privy to.

It seems pretty certain that the shareholder-led shakeup at Chesapeake will improve governance by shaking up an entrenched board, subjecting it to re-election each year, and creating some soft form of accountability in the requirement that a rejected director resign (though the remaining directors need not accept his resignation and, if they do, they still get to pick his replacement without shareholder input). But it’s also a good reminder that shareholder democracy, day to day, functions mostly as symbolism: dispersed public shareholders have limited power, and even their beefed-up protections in the New Chesapeake don’t give them any actual ability to replace directors, change bylaws, or do much of anything else.

The power standing behind these shareholder protections is more subtle. A small part of it is that disgruntled shareholders can dump the stock, pushing down the net worth of management (and, sometimes, triggering margin calls). A bigger part, though, is that disgruntled shareholders are more likely to be receptive to people who are in the business of running proxy fights – or hostile takeovers. The 75% of shareholders who are fed up with Chesapeake’s governance prepared the ground for Icahn to take action with his 7.6% stake, but there’s a reason his 7.6% got more done than their 75%.

Chesapeake Directors Resign After Shareholder Rejection [Bloomberg]
Chesapeake Energy Corporation Announces Preliminary Voting Results from Annual Shareholder Meeting [CHK]
Chesapeake’s proxy [EDGAR]

* This is a little oversimplified. The proposal requires you to have been a 3% shareholder for three years to nominate a director, so Icahn’s new stake probably disqualifies him. And Chesapeake, under Oklahoma law, has a staggered board so you couldn’t replace four directors at once in the ordinary course (though you could if the old guys resigned). As part of the Southeastern/Icahn better-governance deal, Chesapeake plans to “seek relief from the Oklahoma statute mandating classified boards of directors for certain Oklahoma incorporated public companies so that shareholders will have the opportunity to elect the entire board of directors at the 2013 Annual Meeting of Shareholders.”

72 comments (hidden for your protection)
Show all comments ↓

Comments (72)

  1. Posted by Guest | June 8, 2012 at 5:27 PM

    What do you do for fun, Matt?

  2. Posted by Texashedge | June 8, 2012 at 5:32 PM

    "Kevin Durant's dick is this big."

  3. Posted by Warren in Omaha | June 8, 2012 at 6:13 PM

    "And Chesapeake, under Oklahoma law, has a staggered board so you couldn’t replace four directors at once in the ordinary course (though you could if the old guys resigned)."

    There are two kinds of "old" business people. Chesapeake didn't have as many as they should have apparently.

  4. Posted by Guest | June 8, 2012 at 6:31 PM

    Why is the Thunders biggest fan on dealbreaker?

    - Guy only looks at the pictures in Matt's artcles and who's office switches CNBC to ESPN around 11o'clock

  5. Posted by Rentech Inc VP of HR | June 8, 2012 at 9:04 PM

    Don't worry, Aubrey, you can join our board. You'll fit right in.

  6. Posted by Bart Simpson | June 10, 2012 at 4:02 AM

    Smithers and Mister Burns will be out of work by the end of the week. SCORE DUDE!!

  7. Posted by 25th Hour Trader | June 11, 2012 at 6:29 PM

    It doesn't matter if CHK fixes their board or not- we'll just dollar cost average into another stock that will blow up.

    -Southeastern Asset Management

  8. Posted by Rob | June 13, 2012 at 12:33 PM

    This guy should be reported for having impersonated an officer of RTK

  9. Posted by JJ Butler | June 14, 2012 at 2:45 PM

    How about some compassion? These guys are busy selling slivers of the company into a tough market so they don't go bankrupt!

  10. Posted by bookmarking service | September 24, 2012 at 2:57 AM

    hCygqk Major thanks for the blog post.Much thanks again. Cool.

  11. Posted by buy reverbnation plays | September 27, 2012 at 9:41 AM

    Very neat article.Really looking forward to read more. Cool.

  12. Posted by wedding photographer | September 28, 2012 at 5:32 AM

    Thanks so much for the blog.Much thanks again. Much obliged.

  13. Posted by interpretation of dreams | September 28, 2012 at 8:19 AM

    Muchos Gracias for your article.Really looking forward to read more. Want more.

  14. Posted by batteries | September 28, 2012 at 10:42 AM

    Thank you ever so for you blog.Much thanks again. Great.

  15. Posted by Buy Instagram Followers | September 28, 2012 at 11:55 AM

    Great blog.Thanks Again. Fantastic.

  16. Posted by term life insurance | September 28, 2012 at 12:10 PM

    A big thank you for your blog. Cool.

  17. Posted by ottawa auto tech | September 28, 2012 at 2:21 PM

    I am so grateful for your article post.Really thank you!

  18. Posted by brian hoedeman | September 28, 2012 at 3:35 PM

    Really appreciate you sharing this blog.Really thank you! Will read on…

  19. Posted by logo designing company | September 28, 2012 at 5:59 PM

    Great, thanks for sharing this article post.Really looking forward to read more. Really Cool.

  20. Posted by greitos paskolos | September 29, 2012 at 6:31 AM

    I cannot thank you enough for the article.Thanks Again. Really Cool.

  21. Posted by Duelling Pianos UK | September 29, 2012 at 8:06 AM

    Im obliged for the article. Want more.

  22. Posted by Game Changer review | September 29, 2012 at 4:28 PM

    Thank you ever so for you blog.Really looking forward to read more. Will read on…

  23. Posted by playground safety surface | September 29, 2012 at 5:24 PM

    I value the blog post. Really Great.

  24. Posted by best e-cig affiliate program | September 30, 2012 at 6:06 AM

    Looking forward to reading more. Great article.Thanks Again. Much obliged.

  25. Posted by 500fastcash | September 30, 2012 at 8:02 AM

    Enjoyed every bit of your blog post.Much thanks again. Much obliged.

  26. Posted by 500fastcash.com | September 30, 2012 at 9:45 AM

    Very good blog. Awesome.

  27. Posted by 500fastcash.com | September 30, 2012 at 11:28 AM

    Thanks for the blog article. Cool.

  28. Posted by subscribers | October 1, 2012 at 8:23 AM

    Looking forward to reading more. Great blog post.Really looking forward to read more. Keep writing.

  29. Posted by erotismo | October 1, 2012 at 11:54 AM

    Im thankful for the blog article.Really looking forward to read more. Great.

  30. Posted by submit | October 1, 2012 at 5:42 PM

    A big thank you for your post.Really looking forward to read more. Really Great.

  31. Posted by Autoblow | October 1, 2012 at 8:34 PM

    I truly appreciate this blog article.Really thank you! Fantastic.

  32. Posted by Dermatologist for all skin colors in Austin | October 2, 2012 at 11:01 AM

    Very neat blog article.Thanks Again. Much obliged.

  33. Posted by santa barbara wedding | October 2, 2012 at 2:54 PM

    Thank you ever so for you article post. Cool.

  34. Posted by dentist calgary | October 3, 2012 at 2:12 AM

    Thanks for sharing, this is a fantastic article post.Thanks Again. Awesome.

  35. Posted by african mango diet dr oz | October 3, 2012 at 4:08 AM

    Thanks-a-mundo for the post.Much thanks again. Keep writing.

  36. Posted by outside pavers | October 3, 2012 at 10:00 AM

    Major thankies for the blog.Much thanks again. Fantastic.

  37. Posted by nexus 7 | October 3, 2012 at 5:55 PM

    Muchos Gracias for your article. Much obliged.

  38. Posted by sexy girl next door | October 3, 2012 at 7:36 PM

    Great, thanks for sharing this article post.Really thank you! Really Cool.

  39. Posted by galaxy note 2 | October 3, 2012 at 8:47 PM

    Thanks again for the blog.Really looking forward to read more. Will read on…

  40. Posted by cheap beats by dre | October 4, 2012 at 3:52 AM

    I really enjoy the blog article. Really Great.

  41. Posted by zija | October 4, 2012 at 5:52 AM

    Really appreciate you sharing this blog article.Thanks Again. Much obliged.

  42. Posted by used auto parts Phoenix | October 4, 2012 at 8:35 AM

    Thanks for the blog.Much thanks again. Awesome.

  43. Posted by stylish home decoration tips here | October 4, 2012 at 8:54 PM

    I value the blog article.Much thanks again. Really Cool.

  44. Posted by byterry | October 5, 2012 at 1:03 AM

    Great article post.Really thank you! Fantastic.

  45. Posted by helpful site | October 5, 2012 at 6:28 AM

    Looking forward to reading more. Great article.Really thank you! Keep writing.

  46. Posted by Buy Instagram Followers | October 5, 2012 at 7:12 AM

    Thank you for your article post.Thanks Again. Really Great.

  47. Posted by Buy Instagram Followers | October 5, 2012 at 6:35 PM

    A round of applause for your blog article. Keep writing.

  48. Posted by ptfe | October 6, 2012 at 5:26 AM

    HI, The blog is very good [url=http://www.autai.com]ptfe[/url]

  49. Posted by ptfe | October 7, 2012 at 12:41 AM

    HI, Thank for your blog. I love your blog. Hope more !! [url=http://www.aulun.com]ptfe[/url]

  50. Posted by zombie defense | October 8, 2012 at 5:27 AM

    Looking forward to reading more. Great post.Really looking forward to read more. Keep writing.

  51. Posted by watch Moonrise Kingdom free | October 8, 2012 at 9:28 AM

    I truly appreciate this blog article.Thanks Again. Great.

  52. Posted by diamants | October 9, 2012 at 8:42 PM

    Really enjoyed this post.Really thank you! Awesome.

  53. Posted by Remote Desktop | October 10, 2012 at 4:51 AM

    I truly appreciate this blog post.Thanks Again. Great.

  54. Posted by jaguar wheels | October 10, 2012 at 7:53 AM

    Im grateful for the blog post.Really thank you! Will read on…

  55. Posted by provides a rich supplement to healthy nutrition | October 10, 2012 at 6:30 PM

    Im grateful for the article.Thanks Again. Cool.

  56. Posted by Austin Web Design | October 11, 2012 at 4:10 AM

    I cannot thank you enough for the blog. Great.

  57. Posted by demolidora | October 11, 2012 at 6:07 AM

    Very neat article post.Really looking forward to read more. Much obliged.

  58. Posted by nightclubs nightclub entertainment | October 11, 2012 at 9:19 AM

    This is one awesome post.Thanks Again.

  59. Posted by philips shoqbox portable speaker sb7300 | October 11, 2012 at 12:20 PM

    Really enjoyed this article post.Thanks Again. Awesome.

  60. Posted by movie news | October 11, 2012 at 10:48 PM

    Awesome article post.

  61. Posted by lose weight with hypnosis | October 12, 2012 at 7:48 AM

    Muchos Gracias for your blog article.Really thank you! Awesome.

  62. Posted by Lorette Lyttle | October 12, 2012 at 9:16 AM

    I cannot thank you enough for the article.Really looking forward to read more. Want more.

  63. Posted by Austin SEO | October 12, 2012 at 5:21 PM

    I value the article post.Thanks Again. Great.

  64. Posted by fbo | October 12, 2012 at 7:18 PM

    A big thank you for your post.Really thank you! Awesome.

  65. Posted by get likes facebook photo contest | October 15, 2012 at 5:24 AM

    This is one awesome article post.Really thank you! Much obliged.

  66. Posted by Hair loss seattle washington | October 15, 2012 at 12:12 PM

    This is one awesome blog.Really thank you! Will read on…

  67. Posted by Salt Lake City Locksmith | October 15, 2012 at 7:39 PM

    I am so grateful for your article.Much thanks again. Want more.

  68. Posted by payday loans | October 16, 2012 at 3:38 AM

    Great, thanks for sharing this blog post. Want more.

  69. Posted by Bolt Admin | October 16, 2012 at 6:19 AM

    Great blog. Great.

  70. Posted by TEFLON | October 16, 2012 at 5:36 PM

    Thank for your blog. It is Goood, Hope more for it. [url=http://www.PTFE-sheet.com]PTFE[/url] [url=http://www.PTFE-rod.com]PTFE[/url] [url=http://www.Teflonrod.com]PTFE[/url] [url=http://www.fluoroplastic.cn]PTFE[/url]

  71. Posted by PTFE PTFE | October 16, 2012 at 6:16 PM

    HI, Thank for your blog. I love your blog. Hope more !! [url=http://www.aulun.com]ptfe[/url] [url=http://www.aidmer.com]Gasket[/url]

  72. Posted by die cutting | October 16, 2012 at 8:29 PM

    Very informative blog.Really thank you! Great.