LEVICK Weekly - Aug 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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LEVICK Weekly - Aug 17 2012

  1. 1. EDITION 4 Weekly August 17, 2012 Chesapeake Energy Feels the Love SEC Tackles Trading System Glitches Johnson & Johnson Shareholders Seek to Restore a Storied Brand Richard Levick on Social MediaR Carner/shutterstock.com
  2. 2. ChesapeakeEnergy In a mere two months since observers dubbed holder revolt was itself just such a decisive the shareholder revolt at Chesapeake Energy force because it sent an indubitable message to “historic,” events have proven they were the marketplace—that here is a company with right, happily so for this industry giant’s all the resolve it needs to set a sound business stakeholders. In the aftermath of the board- course and stick to it. room and C-Suite changes that occurred in One can debate if founder Aubrey McClendon Feels the Love June, share value has enjoyed strong double- should have been altogether removed from digit growth (as of late last week). the picture; in June I suggested in this column Such an increase would be encouraging under that a total break was ideal. Instead, McClen- any circumstance but this baby was born even don lost the chairmanship but stayed on asRichard S. Levick, Esq. as cash flow was reportedly halved and long- CEO while activists Carl Icahn and Southeast-Originally Published on Forbes.com term debt continued to increase. Strictly from ern Asset Management brought on four new a numbers standpoint, Chesapeake’s commit- board members. ment to an additional disposal of assets from a McClendon notwithstanding, the point is that prior projection of $11.5 billion to $13 billion, the strong positive marketplace response in Q2 and the total net proceeds that will accrue, was may show that there was likewise a residual certainly a spur to investor confidence. (A sale confidence in this company, which is, after all, agreement for one of the new divestitures has the second-largest natural gas producer in the reportedly already been signed.) U.S. after ExxonMobil. For all the storm and Chesapeake’s second-quarter earnings report, stress that roiled Chesapeake in 2012, inves- released early last week, confirms that the tors were perhaps just waiting for a reason to company sold $4.7 billion worth of assets in prove that confidence. To be sure, for any or- Q2 and anticipates unloading $7 billion more ganization that enjoys such latent reputational in Q3. (Analysts particularly welcomed that equity, there’s an additional lesson here: don’t projection.) The company promises to limit un- squander that equity in peacetime because proven gas and oil property acquisitions to $2 you’ll surely need it under siege. billion this year and a stunningly low $400 mil- In Chesapeake’s case, investors obviously lion in 2013. What a difference a day makes! found that reason to “prove their confidence.” But as with all “historic” events, there are It’s all to the point that, in its announcement larger forces at work than numbers and pro- last week, the company was only able to ex- jections. In the case of Chesapeake, the share- press confidence that cash flow will overtake Zorandim/shutterstock.com
  3. 3. Weekly“ 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. ”spending. But “that may well be true, given one reporter. “Sure. But the market likes it.”the changed board,” observed the Wall Street Of course, after Aubrey McClendon, even CarlJournal [emphasis added]. Icahn seems boring.For any public company, new board members The Chesapeake saga likewise underscores the GTS Production/shutterstock.commay be agents of unwelcome change and the public instinct to forgive, given a credible vowwholly self-interested agendas of the activists to do better in the future that is supported bywho get them appointed. Or, as seems to be concrete data specifying how it will do bet- Second, it will remain an extremely significant In the immediate aftermath of the shareholderthe case at Chesapeake, they may be the most ter. Again, though, such credibility requires governance story because, in just a year or revolt, before the recent round of divestiturereliable enforcers of business discipline. If sacrifice in the form of change. If McClendon’s two, the world will have additionally unmis- announcements, the company was already thenothing else, these boardroom changes debunk continued tenure as CEO raises doubt in this takable evidence that board independence is focus of articles with titles like, “Is Chesapeakeglib stereotypes of activists as investors solely respect, the power of a new board—now essential to economic survival. Companies Energy abandoning the Marcellus Shale region?”absorbed in short-term returns. To the contrary headed by Archie Dunham, whose prior ser- are well-advised not to view Chesapeake or The ongoing communications challenge forat Chesapeake, the company has now embarked vice at ConocoPhillips presumably equips him others that confront publicly conspicuous Chesapeake is thus very much the same ason a prudent strategy of measured growth that with rich industry expertise as well as sound leadership challenges as in any way unique. for any company that decides to pull out ofwill probably disappoint speculators. business vision – can already be seen to have The same need for board empowerment ap- a region or shutter facilities. The one salient revivified stakeholder commitment. plies everywhere, regardless of whether theThe shareholder revolt at Chesapeake was thus difference is that, by continuing to meet this board members are appointed by activists orhistoric, not only for its drama, but because it The Chesapeake story will continue to develop challenge, Chesapeake has an additionally in- serve despite them.remains such a pointed example of the poten- on at least three levels. First, it is a key part valuable opportunity to show off its own trans-tially salutary effects of activism itself. Chesa- of the ongoing natural gas industry story—an Finally, Chesapeake will remain very much formation from frontier entrepreneurship topeake now promises to reduce long-term debt energy issue second in importance to none a communications story, and we don’t just institutionalized corporate good citizenship. Lfrom $13.3 billion to $9.5 billion by the end of —especially as the major oil companies have mean IR or best earnings report practices. Richard S. Levick, Esq., President and CEO of LEVICK,the year. Along with the aforementioned dives- so much to gain with the kind of overnight Communities throughout the country are represents countries and companies in the highest-stakestitures, Chesapeake can well have positive cash toehold in the natural gas sector that wholesale concerned about their own local economies global communications matters — from the Wall Street and the impact of Chesapeake’s retrenchment. crisis and the Gulf oil spill to Guantanamo Bay and theflow by 2013 if not sooner. “Boring?” asked acquisition of divested assets can provide. Catholic Church.
  4. 4. SEC TacklesTrading System It’s said that once is happenstance; twice is coincidence; and three times is enemy action. tems.” That’s precisely what you would expect from an SEC that continues to successfullyGlitches With investors reeling from a series of trading burnish its investor confidence and protection technology glitches that have cost hundreds credentials. The Commission has recognized of millions of dollars, the U.S. Securities and that automation isn’t going away and is proac- Exchange Commission (SEC) is embracing this tively taking steps to ensure that this underly- wisdom – originally uttered in Ian Fleming’s ing infrastructure is well positioned to lead toMichael W. Robinson Bond classic Goldfinger—by taking steps to en- an efficient and orderly marketplace.Originally Published on LEVICK Daily sure that a sputtering economic recovery isn’t Simply put, the SEC is sending the right mes- further impeded by those pesky ones and ze- sage. Now it’s time for market makers and roes that facilitate securities transactions today. participants to do the same. On August 1st, trading system failures that In the present context, that means more than caused the Flash Crash of 2010 and were part simply reporting problems when they arise. of Facebook’s IPO debacle struck again with Markets and trading firms now have an op- similar problems at Knight Capital’s market- portunity to articulate the many ways in which making unit, which executes close to ten per- they go beyond compliance to ensure that every cent of all trading in U.S. stocks. The glitches trade is executed as ordered. While certainly a cost $440 million and resulted in Knight’s des- step in the right direction, the private sector has perate search for a capital injection As a result, a role to play in this recovery as well. Indeed, the SEC is proposing a new set of regulations it will take just such collective efforts to restore that would build on automation review poli- fundamental trust in the marketplace. L cies enacted after the crash of 1987. These new rules would require, among other things, that Michael W. Robinson is an Executive Vice President at Levick Strategic Communications and a contributing author trading firms disclose system failures and test to Levick Daily. 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- Yellowj/shutterstock.com
  5. 5. Johnson & JohnsonShareholders “ ...reputation can never be owned outright. Reputation is only leased, with the payment being a consistent commitment to putting principles before profits.”Seek to Restore In the early 1980s, Johnson & Johnson wrote the company’s management for failing toa Storied Brand the crisis communications playbook with adequately address these troubling issues in its response to the deadly Tylenol tamper- a timely fashion. Investors claimed that the ing episode. The company acted fast to company’s decentralized management struc- announce that it was pulling every bottle of ture allowed directors and senior managers to its leading pain reliever from the shelves. It assert “plausible deniability” when it came toDavid BartlettOriginally Published on LEVICK Daily pioneered tamper proof gel caps as a long the rash of problem that were tarnishing the term solution to the problem. As a result company’s reputation for ethics, safety, and its demonstration of concern for consumer reliability. This summer, J&J settled the lawsuit safety, J&J earned decades of goodwill and while still denying the allegations. market dominance. The settlement calls for the creation of a new Over the years, J&J built a stakeholder trust committee, comprised of independent board bank that a host of recent scandals and quality members, that will receive regular reports issues have yet to fully deplete. But corporate from management on safety, quality, and legal reputation can never be owned outright. Repu- issues that could negatively impact the J&J tation is only leased, with the payment being brand and share price. The goal of the Regu- a consistent commitment to putting principles latory, Compliance, and Government Affairs before profits. It has been a while since J&J Committee is to ensure that potential problems made a significant deposit in its trust bank. As are nipped in the bud before they evolve into a result, the company’s shareholders recently acute crises. The clear objective is to make took dramatic action to ensure that future sure that the company’s response to any major withdrawals do not land the company and its issues will demonstrate the same level of care reputation out in the street. and concern for patient safety that earned it such a gold-plated reputation back demonstrat- In the wake of a steady string of recalls, qual- ed in the 1980s. ity issues, and reports that executives paid kickbacks to boost sales, J&J shareholders sued Anastasia Petrova/shutterstock.com
  6. 6. Weekly Richard Levick Social Media Pablo Eder/shutterstock.comAs the company takes a step back to the fu- Investor patience is at an all-time low. The prob-ture, there are two lessons for companies in ability that already difficult situations will bethe healthcare and consumer products space. made worse by investor action against manage- Richard S. Levick, Esq., President and CEO of LEVICK, discusses the importance and impact ofFirst, even the best corporate reputations are ment and directors is at an all-time high. social media today.susceptible to erosion. When companies in cri- Remember, if it can happen to a company thatsis choose to fall back on a strong reputation, was once a shining example of effective crisisrather than take decisive action to protect the management, it can happen to anyone. Lbrand, they can quickly undo all the good workthat has gone into building enviable levels of David Bartlett is a Senior Vice President at LEVICK and a contributing author to LEVICK Daily.consumer loyalty and stakeholder confidence. Financial CommunicationsSecond, companies need to understand that it is Litigationnot just consumers, regulators, and legislators Corporate & Reputationwho need to be engaged when problems arise. Public Affairs Crisis Sign Up Today