LEVICK Weekly - Aug 17 2012
description
Transcript of LEVICK Weekly - Aug 17 2012
EDITION 4
WeeklyAugusT 17, 2012
R Carner/shutterstock.com
Chesapeake Energy Feels the Love
SEC Tackles Trading System Glitches
Johnson & Johnson Shareholders Seek to Restore a Storied Brand
Richard Levick on Social Media
Zorandim/shutterstock.com
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.
L
GTS Production/shutterstock.com
Yellowj/shutterstock.com
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.
L
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.”
Anastasia Petrova/shutterstock.com
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.
L
Pablo Eder/shutterstock.com
riChard leviCk
Richard S. Levick, Esq., President and CEO of LEVICK, discusses the importance and impact of
social media today.
social media
Crisis
LitigationFinanCiaL CommuniCations
Corporate & reputationpubLiC aFFairs
sign Up today
the UrgenCyoF noW.