EDITION 4

WeeklyAugusT 17, 2012

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Chesapeake Energy Feels the Love

SEC Tackles Trading System Glitches

Johnson & Johnson Shareholders Seek to Restore a Storied Brand

Richard Levick on Social Media

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Chesapeake energyFeels the love

Richard s. Levick, Esq.Originally Published on Forbes.com

In a mere two months since observers dubbed

the shareholder revolt at Chesapeake Energy

“historic,” events have proven they were

right, happily so for this industry giant’s

stakeholders. In the aftermath of the board-

room and C-Suite changes that occurred in

June, share value has enjoyed strong double-

digit growth (as of late last week).

Such an increase would be encouraging under

any circumstance but this baby was born even

as cash flow was reportedly halved and long-

term debt continued to increase. Strictly from

a numbers standpoint, Chesapeake’s commit-

ment to an additional disposal of assets from a

prior projection of $11.5 billion to $13 billion,

and the total net proceeds that will accrue, was

certainly a spur to investor confidence. (A sale

agreement for one of the new divestitures has

reportedly already been signed.)

Chesapeake’s second-quarter earnings report,

released early last week, confirms that the

company sold $4.7 billion worth of assets in

Q2 and anticipates unloading $7 billion more

in Q3. (Analysts particularly welcomed that

projection.) The company promises to limit un-

proven gas and oil property acquisitions to $2

billion this year and a stunningly low $400 mil-

lion in 2013. What a difference a day makes!

But as with all “historic” events, there are

larger forces at work than numbers and pro-

jections. In the case of Chesapeake, the share-

holder revolt was itself just such a decisive

force because it sent an indubitable message to

the marketplace—that here is a company with

all the resolve it needs to set a sound business

course and stick to it.

One can debate if founder Aubrey McClendon

should have been altogether removed from

the picture; in June I suggested in this column

that a total break was ideal. Instead, McClen-

don lost the chairmanship but stayed on as

CEO while activists Carl Icahn and Southeast-

ern Asset Management brought on four new

board members.

McClendon notwithstanding, the point is that

the strong positive marketplace response in Q2

may show that there was likewise a residual

confidence in this company, which is, after all,

the second-largest natural gas producer in the

U.S. after ExxonMobil. For all the storm and

stress that roiled Chesapeake in 2012, inves-

tors were perhaps just waiting for a reason to

prove that confidence. To be sure, for any or-

ganization that enjoys such latent reputational

equity, there’s an additional lesson here: don’t

squander that equity in peacetime because

you’ll surely need it under siege.

In Chesapeake’s case, investors obviously

found that reason to “prove their confidence.”

It’s all to the point that, in its announcement

last week, the company was only able to ex-

press confidence that cash flow will overtake

Weekly

spending. But “that may well be true, given

the changed board,” observed the Wall Street

Journal [emphasis added].

For any public company, new board members

may be agents of unwelcome change and the

wholly self-interested agendas of the activists

who get them appointed. Or, as seems to be

the case at Chesapeake, they may be the most

reliable enforcers of business discipline. If

nothing else, these boardroom changes debunk

glib stereotypes of activists as investors solely

absorbed in short-term returns. To the contrary

at Chesapeake, the company has now embarked

on a prudent strategy of measured growth that

will probably disappoint speculators.

The shareholder revolt at Chesapeake was thus

historic, not only for its drama, but because it

remains such a pointed example of the poten-

tially salutary effects of activism itself. Chesa-

peake now promises to reduce long-term debt

from $13.3 billion to $9.5 billion by the end of

the year. Along with the aforementioned dives-

titures, Chesapeake can well have positive cash

flow by 2013 if not sooner. “Boring?” asked

one reporter. “Sure. But the market likes it.”

Of course, after Aubrey McClendon, even Carl

Icahn seems boring.

The Chesapeake saga likewise underscores the

public instinct to forgive, given a credible vow

to do better in the future that is supported by

concrete data specifying how it will do bet-

ter. Again, though, such credibility requires

sacrifice in the form of change. If McClendon’s

continued tenure as CEO raises doubt in this

respect, the power of a new board—now

headed by Archie Dunham, whose prior ser-

vice at ConocoPhillips presumably equips him

with rich industry expertise as well as sound

business vision – can already be seen to have

revivified stakeholder commitment.

The Chesapeake story will continue to develop

on at least three levels. First, it is a key part

of the ongoing natural gas industry story—an

energy issue second in importance to none

—especially as the major oil companies have

so much to gain with the kind of overnight

toehold in the natural gas sector that wholesale

acquisition of divested assets can provide.

“ The shareholder revolt at Chesapeake was thus historic, not only for its drama, but because it remains such a pointed example of the potentially salutary effects of activism itself. ”

Second, it will remain an extremely significant

governance story because, in just a year or

two, the world will have additionally unmis-

takable evidence that board independence is

essential to economic survival. Companies

are well-advised not to view Chesapeake or

others that confront publicly conspicuous

leadership challenges as in any way unique.

The same need for board empowerment ap-

plies everywhere, regardless of whether the

board members are appointed by activists or

serve despite them.

Finally, Chesapeake will remain very much

a communications story, and we don’t just

mean IR or best earnings report practices.

Communities throughout the country are

concerned about their own local economies

and the impact of Chesapeake’s retrenchment.

In the immediate aftermath of the shareholder

revolt, before the recent round of divestiture

announcements, the company was already the

focus of articles with titles like, “Is Chesapeake

Energy abandoning the Marcellus Shale region?”

The ongoing communications challenge for

Chesapeake is thus very much the same as

for any company that decides to pull out of

a region or shutter facilities. The one salient

difference is that, by continuing to meet this

challenge, Chesapeake has an additionally in-

valuable opportunity to show off its own trans-

formation from frontier entrepreneurship to

institutionalized corporate good citizenship.

Richard S. Levick, Esq., President and CEO of LEVICK,

represents countries and companies in the highest-stakes

global communications matters — from the Wall Street

crisis and the Gulf oil spill to Guantanamo Bay and the

Catholic Church.

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seC taCkles trading system glitChes

It’s said that once is happenstance; twice is

coincidence; and three times is enemy action.

With investors reeling from a series of trading

technology glitches that have cost hundreds

of millions of dollars, the U.S. Securities and

Exchange Commission (SEC) is embracing this

wisdom – originally uttered in Ian Fleming’s

Bond classic Goldfinger—by taking steps to en-

sure that a sputtering economic recovery isn’t

further impeded by those pesky ones and ze-

roes that facilitate securities transactions today.

On August 1st, trading system failures that

caused the Flash Crash of 2010 and were part

of Facebook’s IPO debacle struck again with

similar problems at Knight Capital’s market-

making unit, which executes close to ten per-

cent of all trading in U.S. stocks. The glitches

cost $440 million and resulted in Knight’s des-

perate search for a capital injection As a result,

the SEC is proposing a new set of regulations

that would build on automation review poli-

cies enacted after the crash of 1987. These new

rules would require, among other things, that

trading firms disclose system failures and test

coding changes before they go live.

According to SEC Chairman Mary Schapiro, the

goal is “to require exchanges and other market

centers to have specific programs in place to

ensure the capacity and integrity of their sys-

tems.” That’s precisely what you would expect

from an SEC that continues to successfully

burnish its investor confidence and protection

credentials. The Commission has recognized

that automation isn’t going away and is proac-

tively taking steps to ensure that this underly-

ing infrastructure is well positioned to lead to

an efficient and orderly marketplace.

Simply put, the SEC is sending the right mes-

sage. Now it’s time for market makers and

participants to do the same.

In the present context, that means more than

simply reporting problems when they arise.

Markets and trading firms now have an op-

portunity to articulate the many ways in which

they go beyond compliance to ensure that every

trade is executed as ordered. While certainly a

step in the right direction, the private sector has

a role to play in this recovery as well. Indeed,

it will take just such collective efforts to restore

fundamental trust in the marketplace.

Michael W. Robinson is an Executive Vice President at

Levick Strategic Communications and a contributing author

to Levick Daily.

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Michael W. RobinsonOriginally Published on LEVICK Daily

In the early 1980s, Johnson & Johnson wrote

the crisis communications playbook with

its response to the deadly Tylenol tamper-

ing episode. The company acted fast to

announce that it was pulling every bottle of

its leading pain reliever from the shelves. It

pioneered tamper proof gel caps as a long

term solution to the problem. As a result

its demonstration of concern for consumer

safety, J&J earned decades of goodwill and

market dominance.

Over the years, J&J built a stakeholder trust

bank that a host of recent scandals and quality

issues have yet to fully deplete. But corporate

reputation can never be owned outright. Repu-

tation is only leased, with the payment being

a consistent commitment to putting principles

before profits. It has been a while since J&J

made a significant deposit in its trust bank. As

a result, the company’s shareholders recently

took dramatic action to ensure that future

withdrawals do not land the company and its

reputation out in the street.

In the wake of a steady string of recalls, qual-

ity issues, and reports that executives paid

kickbacks to boost sales, J&J shareholders sued

the company’s management for failing to

adequately address these troubling issues in

a timely fashion. Investors claimed that the

company’s decentralized management struc-

ture allowed directors and senior managers to

assert “plausible deniability” when it came to

the rash of problem that were tarnishing the

company’s reputation for ethics, safety, and

reliability. This summer, J&J settled the lawsuit

while still denying the allegations.

The settlement calls for the creation of a new

committee, comprised of independent board

members, that will receive regular reports

from management on safety, quality, and legal

issues that could negatively impact the J&J

brand and share price. The goal of the Regu-

latory, Compliance, and Government Affairs

Committee is to ensure that potential problems

are nipped in the bud before they evolve into

acute crises. The clear objective is to make

sure that the company’s response to any major

issues will demonstrate the same level of care

and concern for patient safety that earned it

such a gold-plated reputation back demonstrat-

ed in the 1980s.

Johnson & Johnson

David BartlettOriginally Published on LEVICK Daily

shAREhOLDERs sEEk TO REsTORE A sTORIED BRAND

“ ...reputation can never be owned outright. Reputation is only leased, with the payment being a consistent commitment to putting principles before profits.”

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Weekly

As the company takes a step back to the fu-

ture, there are two lessons for companies in

the healthcare and consumer products space.

First, even the best corporate reputations are

susceptible to erosion. When companies in cri-

sis choose to fall back on a strong reputation,

rather than take decisive action to protect the

brand, they can quickly undo all the good work

that has gone into building enviable levels of

consumer loyalty and stakeholder confidence.

Second, companies need to understand that it is

not just consumers, regulators, and legislators

who need to be engaged when problems arise.

Investor patience is at an all-time low. The prob-

ability that already difficult situations will be

made worse by investor action against manage-

ment and directors is at an all-time high.

Remember, if it can happen to a company that

was once a shining example of effective crisis

management, it can happen to anyone.

David Bartlett is a Senior Vice President at LEVICK and a

contributing author to LEVICK Daily.

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riChard leviCk

Richard S. Levick, Esq., President and CEO of LEVICK, discusses the importance and impact of

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