In 2009, investor Jeffrey Bronchick told directors of Chesapeake Energy Corp. that he was disgusted with their leadership.

“I have never seen a more shameful document than the Chesapeake proxy statement,” he wrote in an April 23, 2009, letter to the board after it paid Chief Executive Officer Aubrey McClendon $100 million in a year when the company’s shares plunged 59 percent. The proxy is “a near perfect illustration of the complete collapse of appropriate corporate governance.”

Three years later, Oklahoma City-based Chesapeake is embroiled in a new controversy over directors’ close ties to McClendon, insider deals and off-the-books loans. Bronchick, however, sees things differently. The natural-gas producer is a good value investment, and the problems with the board no longer bother him, he said in an interview.

“Chesapeake’s board doesn’t engender confidence, but the problem isn’t governance, it’s $2 gas prices,” said Bronchick, head of El Segundo, California-based Cove Street Capital, which held 306,088 Chesapeake shares at March 31. “I would have thought that after what McClendon went through in 2009, he would have adopted stricter governance, tightened capital spending and stopped having to be the biggest guy in the room. Still, he can pull it off once gas hits $3 or $4” per million British thermal units. Gas ended last week at about $2.50.

New Chairman

The tension investors sometimes see between appropriate corporate governance and possible rewards from value have rarely been more apparent than in the case of Chesapeake. The board is drawing increased attention because billionaire investor Carl Icahn, known for pushing for change at the companies in which he invests, last week announced he bought a 7.65 percent stake and demanded four directors be replaced.

The board was already searching for a new chairman to replace McClendon, who will remain CEO and a director of the company he co-founded 23 years ago. That search began after revelations last month about McClendon’s borrowing from firms that do business with the company. The stock dropped 29 percent this year through May 25 because of questions about McClendon’s leadership and low prices for natural gas.

The company responded to Icahn with a statement on May 25 saying that “after an independent chairman is named, the board’s nominating committee will consult with shareholders and carefully review Mr. Icahn’s request for board representation.”

Previous to that Chesapeake had said it was confident of the board’s independence, according to a May 20 statement by Michael Kehs, a company spokesman. Chesapeake is handling all requests for comment from directors, Kehs has said.

“Each of Chesapeake’s directors has built a superb reputation based on impeccable credentials, independent judgment and unwavering integrity,” he said.

Under Siege

The highly compensated board has been under siege for more than three years. New York City Comptroller John Liu, who controls pension funds that own 1.9 million Chesapeake shares, said the company’s “root problem” is “the directors themselves and their failure to protect long-term shareowner value.” Two of the nine directors face re-election at the annual meeting June 8, and Liu said he would withhold votes from them.

It’s largely a symbolic gesture. There are no opposing candidates and, under Chesapeake’s rules, a board member doesn’t need a majority of votes cast to win re-election.

In 2009, by 78.7 percent of votes cast, shareholders approved a majority-vote measure. The board ignored that advisory vote. Shareholders also approved a measure to have all board members elected every year, not one-third of them every three years. This makes boards more accountable, according to corporate-governance experts.

Advice Ignored

The company also ignored that advice. A year later, Oklahoma passed a law prohibiting annual elections of entire boards for large, publicly traded companies registered in the state and requiring staggered terms for directors.

In response to the Oklahoma law, shareholders such as New York State Comptroller Thomas DiNapoli are backing a resolution at the annual meeting to force Chesapeake to re-incorporate in Delaware. The company opposes the measure.

After Chesapeake directors were criticized this year, the company announced that board members cut their own pay. They’ll still receive 34 percent more than the average $260,752 in compensation received last year by board members at 15 other exploration and production companies on the Standard & Poor’s 500 Index, according to Bloomberg calculations.

The company also said it now supports a majority rule, which is the practice at about three-quarters of public companies. Under Chesapeake’s proposal, which will be considered at the annual meeting, any director nominee who doesn’t receive a majority vote must submit a resignation. The board can reject the resignation, however.

Paid $343 Million

“The board retains the ultimate authority,” Glass Lewis & Co., the proxy advisory firm, wrote in a report to clients. “This policy does not take the majority vote standard far enough.”

Michael Gardner, governance expert for the New York City comptroller, said none of this was sufficient because the board is too close to McClendon. Lead director Merrill A. “Pete” Miller is CEO of National Oilwell Varco Inc., a drilling equipment maker that has been paid more than $343 million by Chesapeake since 2009, according to a filing with the U.S. Securities & Exchange Commission. Board member V. Burns Hargis is president of the Oklahoma State University system, which has received more than $10 million in Chesapeake funding, according to filings and university publications.

’Under Siege’

“Over and over this is a board that gives crumbs when it’s under siege,” Gardner said in an interview. “This board is rife with conflicts of interest and egregious pay. There’s a disconnect between what they think they need to do to restore shareholder confidence and what shareholders think they should do.”

Still, Chesapeake may be a cheap way to buy into the U.S. shale revolution, according to Fadel Gheit and Robert du Boff, two Oppenheimer & Co. analysts who rate the stock outperform, saying the shares are worth “several times the current price.”

The company is the largest U.S. holder of onshore drilling leases, with 15.6 million acres under its control and proved reserves equivalent to 3.13 billion barrels of oil.

Natural gas futures for June delivery closed down 6.3 percent last week at $2.48 per million Btus. That erased some of their 37 percent rally since April 19 and still left the commodity about 75 percent below its mid-2008 high. Despite the current glut of gas from new wells in shale formations from Texas to Pennsylvania, an incipient gas rally portends well for Chesapeake. It holds reserves vast enough to satisfy four years of U.S. household demand.

Chesapeake shares “have plummeted in recent weeks on relentless attacks by the media, deserved and undeserved, for excessive compensation of its CEO and board, lack of transparency and complex financial structure,” Gheit and du Boff said in a May 22 report to clients. “Although some changes have been made, more are needed.”