Chesapeake Flips Its Shareholders the Bird

I've taken a few shots at Chesapeake Energy (NYSE: CHK  ) lately, largely over the lavish compensation its CEO Aubrey McClendon enjoys. Now, the massive gas producer's latest affront to its shareholders adds insult to that injury.

At the company's most recent shareholder meeting, opponents of the clubby atmosphere between Chesapeake's management and board couldn't muster the votes to bring about change. The voting did, however, show definite unrest among shareholders, and there's been speculation that even more votes could have gone against the company's lordly interests if Lou Simpson -- formerly the investing guru for Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) GEICO unit -- hadn't been put up for board election.

But I hold out little hope that Simpson alone can turn this governance disaster around. The latest sign? An Oklahoma law that Chesapeake helped craft, which requires that state's companies to have staggered boards.

Staggeringly unfriendly
In a staggered board, every director isn't up for election every year. That makes it harder for shareholders to clean house when a company isn't acting in their best interests.

But don't take it from me. Here's what Fool co-founder Tom Gardner had to say last year, when he testified before a U.S. House Financial Services Subcommittee:

When staggered boards are in place, a majority of shareholders looking to replace directors must overcome enormous institutional constraints. Removing a set of poorly performing directors may take multiple elections and several years, assuming it can be done at all. In cases of incompetent or corrupt leadership, staggered boards ingrain the status quo.

Some shareholders have been trying for years to get Chesapeake to move from a staggered board to a more shareholder-friendly annual election for all directors. This new legislation is great for the entrenched interests at the company, because when shareholders get miffed, the company can now throw up its hands and say, "Sorry! We have to have a staggered board! It's the law!"

Some companies actually like their shareholders
Chesapeake's conduct makes me gag because its greed and disregard for shareholders is so ridiculously transparent.

As I've covered on multiple occasions, McClendon gets paid a king's ransom whether or not the company performs. Worse yet, in 2010, five of the eight Chesapeake directors were compensated more than $500,000. When you're pulling in that kind of cheese, there's little doubt that you'd be thrilled if it were suddenly harder for shareholders to kick you off the gravy train.

While Chesapeake seems to be great at finding new and innovative ways to show shareholders that it doesn't give a rat's patoot what they think, other companies don't feel the same way. According to The Wall Street Journal, Oklahoma-based ONEOK (NYSE: OKE  ) and OGE Energy (NYSE: OGE  ) were disappointed when they learned about the law. (It's more than a year old, but it was buried in a massive 115 page bill.) ONEOK hasn't  had a staggered board in years, and OGE had just recently stepped away from that arrangement itself.

I know that many investors are willing to overlook this major, obvious blemish on Chesapeake because of the promise that natural gas holds. But as for me, I don't think all of the Maalox on all of the grocery shelves worldwide could help me stomach this kind of obvious disregard for shareholder wishes.

The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of ONEOK, Chesapeake Energy, and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2011, at 1:47 PM, pondee619 wrote:

    So, Chesapeake Energy (NYSE: CHK ) is a sell?

  • Report this Comment On July 12, 2011, at 10:52 PM, mm5525 wrote:

    I couldn't care less how much Aubrey is paid. My how the USA has changed in that making lots of money is somehow a bad thing and is demonized constantly by people all over the place.

  • Report this Comment On July 13, 2011, at 8:59 AM, dlomax77 wrote:

    Really? During which period did shareholders approve of underperforming executives being overpaid? Your implication that finally trying to do something about it is a change for the worse is ridiculous.

  • Report this Comment On July 13, 2011, at 9:29 AM, mm5525 wrote:

    Aubrey McClendon co-founded the company in the early 1980s from scratch and turned it into a multi-billion dollar empire and leader in the natural gas exploration technology realm that has changed the world. If shareholders don't like his compensation package, don't invest in the company he created. To suggest he is "underperforming" and is "overpaid" is ridiculous. Concentrate on your bottom line and your own compensation package rather than worry about someone else's.

  • Report this Comment On July 13, 2011, at 10:04 AM, SF321 wrote:

    And after he co-founded the company, he decided to take it public. That means he is obligated to worry about members of the general public who don't like his compensation package. What happened in the early 80s happened in the early 80s. That's a long time to rest on one's laurels.

    When disgruntled shareholders suggest that a CEO/Board is underperforming and overpaid, they ARE worrying about their own bottom line. In fact, some members of the public may purchase shares specifically because they see a company that could be more efficient and profitable were its board members replaced and its CEO relegated to an emeritus position. A bad-governance value play, if you will.

  • Report this Comment On July 13, 2011, at 10:33 AM, TMFKopp wrote:

    @SF321

    Well put.

    @mm5525

    Reiterating SF321's comment, at this point it doesn't matter all that much that McClendon founded the company. He is not a full or even majority owner of the company, in fact, because he decided to gamble with his CHK shares, McClendon owns precious little of the company. As such, his pay should be based on the wishes of the real owners.

    The way the founding equation works is that when you start a company, as the owner you benefit from the profits of that company. But when you decide to sell that company -- whether to a strategic, a financial buyer, or the public -- you no longer get to take whatever you want from the company because, well, it's not yours anymore! If the new owner decides to continue to employ you, then you need to be willing to accept comp that's agreeable to that owner.

    The above shows the ridiculous lengths that the company is going to to make it difficult for shareholders to make changes.

    Matt

  • Report this Comment On July 13, 2011, at 11:56 AM, mm5525 wrote:

    Perhaps the law was put into effect to retain top talent and prevent radical changes due to sudden, short-term assaults by those who practice envy-economics on a regular basis? While bashing CEO pay is the topic-de-jour, a slower, more thoughful and tiered approach prevents any radical changes in management that would cause massive disruptions in management of the company, which thusly affects shareholder value. Perhaps you should have considered that aspect of the law.

  • Report this Comment On July 13, 2011, at 1:02 PM, TMFKopp wrote:

    @mm5525

    Major changes in a board of directors (in most cases) requires the vote of a majority of shares. If a majority of shares is voting to oust the board and shake up management, particularly at a $20 billion company, then you've got more than just a wacky activist investor looking for a short-term gain.

    In other words, there's a high bar for shareholders to make major changes and the fact that Chesapeake went to these lengths to make it even more difficult on shareholders suggests that it knows that shareholders are upset and are liable to do something not in the best interests of the entrenched interests. Funny (aggravating / disgusting / disappointing) that this is the answer rather than trying to address the cause of shareholder discontent.

    So, yes, I did consider that aspect of the law, and it's a very flimsy argument. Though I'm sure it's the argument that Chesapeake would make. And it's an easy argument to make when you're a board member making $500,000 per year.

    I know you think you're arguing in defense of capitalism at its best, but you're not. The owners of the company should have final say over whether the compensation package of its top employee (and that's what McClendon is now) is fair, not that employee and his pals.

    Matt

  • Report this Comment On July 13, 2011, at 1:28 PM, mm5525 wrote:

    Well, I'm glad you "considered" that aspect to the law, but such considerating is aboslutely NOWHERE to be found among your borderline tirade including words such as "greedy" "lavish" "flipping the bird" "insult to injury" "governance disaster." Are you kidding me? A disaster? Can you be more dramatic??

    Then there's this: "Chesapeake's conduct makes me gag because its greed and disregard for shareholders is so ridiculously transparent."

    Maybe they're trying to protect their interests, as well as the majority of the shareholders, against people who feel the way you do about CEO and executive pay? Are you seriously gagging over the "greed" and "disregard for shareholders is so ridiculously transparent" among other things? If so, perhaps you ought to get out more and stop to smell the roses.

    Then there's this: "Worse yet, in 2010, five of the eight Chesapeake directors were compensated more than $500,000."

    So what? You said it was a multi-billion dollar company did you not? What business is it of yours what they are paid?

    Finally, we have this: "But as for me, I don't think all of the Maalox on all of the grocery shelves worldwide could help me stomach this kind of obvious disregard for shareholder wishes."

    Again, so what? Don't invest in the company if you do not like their policies. No one is putting a gun to someone's head to invest in Chesapeake Energy. Vote with your capital. If shareholders are upset, they can sell their shares.

    Please consider worrying about your own compensation and pay packages rather than "gagging" over other packages of executives people CHOOSE to invest their money into and can CHOOSE to sell at any time.

    .

  • Report this Comment On July 13, 2011, at 1:38 PM, mm5525 wrote:

    *consideration

    *absolutely

    The assault against wealth makes me type too fast, especially when the stance is called "flimsy" by the author, someone who is going out of their way to insinuate a "high bar for shareholders to make changes" is somehow NOT a good thing.

  • Report this Comment On July 13, 2011, at 2:28 PM, SF321 wrote:

    @ mm5525

    No one at the Fool would have ever written a column about CHK executive pay were the company performing well. It is a company with incredible potential, and will likely play a major role in meeting future US energy needs. The company has the the anatomy of a blue chip, but lacks the chemistry.

    I own shares of CHKM (less direct commodity exposure) rather than CHK, because I believe that CHK management has been preventing the company from fulfilling in recent years. To wit: http://www.fool.com/retirement/general/2011/07/13/is-chesape...

    I don't care if my CEO is Scroogin' it up in his money bin if things are going well. When the current ratio has been less than 1.0 for the last two years, you can't blame someone for raising an eyebrow at massive paydays. When that same governance team is quietly getting laws passed to make it harder for them to get fired, I think "greed and disregard for shareholders" is justifiable language.

  • Report this Comment On July 13, 2011, at 2:31 PM, SF321 wrote:

    * fulfilling its potential in recent years.

    The assault against common sense and shareholder rights makes ME type too fast.

  • Report this Comment On July 13, 2011, at 2:33 PM, TMFKopp wrote:

    @mm5525

    I was tempted to say that we have a basic philosophical difference here, but I don't think we do. If you start a company and you own that company, you are free to pay yourself whatever you want and pillage whatever you want from that company. It's yours.

    Likewise, if you're a highly successful public company CEO and you have a lavish compensation package that rewards you based on pre-defined performance criteria and shareholders are OK with that pay package, then more power to you.

    Aubrey McClendon is not the owner of Chesapeake. He is *an* owner. And a very small owner at that with less than 1% of the shares outstanding. In fact, collectively, all insiders at Chesapeake own less than 1% of the shares of the company.

    That means that other owners own more than 99% of the company. And if a majority of those owners want to get together and say that things should change at the company, there's no reason why they should be blocked. To think that the <1% interests are making it harder for the >99% interests to let their interests be done is ridiculous.

    That's not capitalism, that's kidnapping (company-napping?).

    Bottom line here: It's not their company!

    Did my article use incendiary language? Yes, but the actions of Chesapeake are so over the top that I believe it calls for such language.

    Finally, as to the directors... I'm not even sure where to begin here. That you would suggest that huge pay packages for the directors at a company that has been criticized for egregious executive compensation is immaterial is a little surprising.

    But I'll leave you with this thought. ExxonMobil is a $400 billion company to Chesapeake's $20 billion. There were two directors out of 11 at XOM that made more than $500k last year and the rest all took in less than $300k. What is it about the much smaller CHK that requires it to pay its directors so much more than what directors receive at a $400 billion company?

    This is not an assault against the wealthy. It's an assault against a company that is being held hostage by greedy insiders.

    Matt

  • Report this Comment On July 13, 2011, at 3:09 PM, mm5525 wrote:

    Obviously the rhetoric has stepped up since the author and his allies have been challenged, yet still avoid the main point: Investing in a company is a choice, and if you do not like the company's policy, you obviously can sell the shares. This has seemed to be forgotten within the context of what "should be" based on the actions of some, but, yet, not the majority, regardless of claims.

    Meanwhile, the assaultive language does, indeed, continue: "Held hostage" (really? held hostage??) by "greedy insiders" (mentioned twice); "over the top" (really?) yet omit the fact it is no business of yours what they are paid, and you are free to look up these payment policies PRIOR to investing capital in such a company. You obviously do not grasp this concept, or you simply refuse to admit that you do not have the sway you think you have to influence such measures. Perhaps you do not grasp the concept of investing in a publically traded company is a choice, not a mandate. Please understand this as soon as humanly possible, as you will make the world a better place.

    McClendon may not be the "owner" of CHK, but he is the CEO. He's the undisputed leader of the organization as well as the faceman. Would you like him to leave and start a new company somewhere else, causing CHK to plummet and cause massive shareholder & company chaos? Considered this have you? It does not appear, yet again, that you have even remotely pondered such a notion.

    Go ahead and write sentence after sentence (well, paragraph after paragraph, and, actually, article after article) about "huge" pay packages; "egregious executive compensation" and a company "held hostage" (seriously??? held hostage???) by greedy insiders, but you are avoiding my entire point: Investing in a publically traded company is a CHOICE.

    Please face the facts. Companies will pay their brass what they say fit, and, thankfully, there's very little people such as yourself and your band of followers can do about it, and, once again, you and yours do NOTHING to address the fact investing in CHK (or CHKM) is anything other than a VOLUNTARILY act.

  • Report this Comment On July 13, 2011, at 4:38 PM, SF321 wrote:

    Regarding the "choice" aspect of this discussion (irrational ad hominem defense? Are you an IR intern at Chesapeake?) I agree with you. In fact, I have voluntarily chosen not to purchase CHK stock for the reasons stated above.

    All it takes is one fund manager or equity analyst or activist shareholder (Aubrey? Mr. Icahn is here to see you...) to make the same voluntary choice regarding CHK governance to significantly impact the stock price/corporate future.

    Everyone that bothers to read this site understands that investing is a choice. No matter how many times you state the obvious, or question the author's choice of words, it does not address the fact that CHK is an underperforming company that is reliant on commodity prices with serious debt issues (66% debt/equity) that does not bring those facts into consideration when paying the boss.

  • Report this Comment On July 13, 2011, at 8:43 PM, TMFKopp wrote:

    @mm5525

    Obviously we're not going to find some agreeable middle ground here.

    Yes, you are entirely correct that investing in CHK is a choice. The truth of that, however, doesn't make the way the company treats its shareholders any more right.

    I guess I'm not sure where the disconnect is, but if CHK had sold itself to CVX or XOM or to a financial buyer like Blackstone or KKR, there would be no question that the new owners would call the shots. It didn't sell itself to one of those groups, it sold itself to public shareholders. But the same should hold -- the owners should be allowed to call some of the major, high-level shots at the company. Not sure why that's such a weird concept.

    Going back to the idea of investing being a choice, the sentiment of "my way or the highway" should be one that goes from owner to employee, not the other way around.

    Matt

  • Report this Comment On July 13, 2011, at 9:42 PM, dbtheonly wrote:

    mm5525,

    How long have you worked for CHk?

  • Report this Comment On July 13, 2011, at 11:51 PM, mm5525 wrote:

    dbtheonly, I have been working for CHK for approximately the same amount of time you have been adding such tremendous insight into the discussion in this thread.

    Matt, it's highly doubtful we'll find any middle ground given your rhetoric from the beginning that does not even remotely resemble middle ground in any way, shape, or form. To say such things like shareholders are being "held hostage" and the like only proves my point, as well as all the other outlandish statements you make in the article I mentioned above, as well as your other anti-CHK articles you posted in the past. I wonder if those who have actually been held hostage would agree with your choice of words to describe shareholders. I get it, you dislike CHK's pay policies. You dislike the law that was put in place in Oklahoma. A staggered board? Wow!! So incredibly awful. You make it sound like it's the worst thing ever in the history of legislation in this country, and I can assure you it's not. Fortunately people who feel the way you do can either do something about it collectively as shareholders, and so far they haven't, or can just continue to complain from afar with one-sided views that make no attempt to be objective in any capacity. Of course, that's what an op ed is, but since you admit you do not own shares in CHK, why not worry about your own pay package and compensation than get worked up to the apparent point of indigestion about someone else's pay package? It essentially is none of your business what a company chooses to pay the people associated with the company.

    FYI - I own shares in CHKM. I am satisfied with the direction of the company, actually satisfied with both CHKM and the GP CHK. I bought the shares to make money, and I am up 25% so far, but I did not buy shares to nitpick the compensation policies. I'd rather the company overpay the brass rather than lose the brass for a constant wave of new management, leadership, and direction.

  • Report this Comment On July 14, 2011, at 11:28 AM, TMFKopp wrote:

    @mm5525

    "It essentially is none of your business what a company chooses to pay the people associated with the company."

    Apparently you misunderstand my business then. I am an investor writing for investors. As such, any issue that I find that I believe could impact investors one way or another is *exactly* my business.

    Matt

  • Report this Comment On July 14, 2011, at 2:10 PM, mm5525 wrote:

    You could make your beefs with the company in a far less divisive and and discordant way, however. Just look at the title of this article for example. Suggesting the company brass is giving shareholders an obscene gesture as the title doesn't help harmony or good will, and I dare you to find any company that actually has such blantant disregard for those who help to fund their operations (as well as pay). Other such confrontational phrases suggesting shareholders being "held hostage" "adding insult to injury" "being paid a king's ransom" "egregious executive compensation" "over the top" etc. only increase the partisanship. You could make your points in a much less confrontational way.

    In closing, it is not your business what they are paid since you own *exactly* zero shares in the company. I am sure it won't stop you from writing about it, which you are obviously free to do, but if you have no ownership stake in the company, it's not your business.

  • Report this Comment On July 19, 2011, at 4:09 AM, kmacattack wrote:

    Iown shares of Chesapeake, and I'm not crazy about the compensation packages, either. Aubrey and Tom Ward built the company from scratch, and made some great decisions years ago. I also own Sandridge, with Tom Ward as CEO. Ward is also paid about $20 million per year, but Sandridge has far outperformed Chesapeake lately as far as share price, more than doubling this year, before pulling back to the current level of a gain of "only" about 70 percent. When Tony Haywood was sacked as chairman of BP a year ago, pundits wondered how he would survive since he likely made $20 million plus as CEO. In fact, the British have a maximum CEO salary cap of $1.5 million per year as a protection for shareholders against greedy "you scratch my back and I'll scratch yours" behavior between boards and CEO's. The limit is not enforced by British "socialist" law, but is rather a rule imposed by the stock exchange itself. An earlier post mentioned that Exxon execs are paid far less than Chesapeake's, which is a good point, especially since Exxon will make about $50 billion net profit this year. while Chesapeake is barely profitable, and is heavily laden with debt, largely due to McClendon's "dice roll" in '08 when he was forced to dump billions of dollars worth of stock in a very short time when his gamble turned sour and he was forced to sell to cover margin calls. McClendon's riverboat gamble cost shareholders billions of dollars and drove share prices down to $10 from near $80. In addition to the board, Chesapeake is loaded with Vice Presidents who all make at least $75,000 per month BASE SALARY, plus perks, sweet deal stock options, etc. which boosts their compensation over the million dollar mark.

    As a shareholder in Clean Energy fuels, I was very happy to hear that Chesapeake is investing $150 million to help Clean Energy build out a network of Compressed Natural Gas filling stations on the nations interstate highways. This conversion for the nations truckers should have happened at least two years ago, and would have if republican senate leader Mitch MoConnell hadn't filibustered the energy bill which had 59 votes in the senate, and has the support of 85 percent of Americans, acccording to a recent Gallop poll. McConnell recently received a $500,000 "contribution" from big oil interests, which want to kill the energy bill. The coal lobbv kicked in another $50,000 to McConnell for good measure. Neither group wants to see any competition for energy supplies. Exxon has hedged their bets by purchasing XTO to offset the possibe loss of the transportation fuel business for America;s truckers, which accounts for 40 percent of foreign oil imports. Chesapeake has the makings of being a truly great company, and I would not necessarily support firing Aubrey, but I think that paying a CEO $21 million as a reward for losing money is a slap in the face to shareholders. The reallly sick thing is that CEO's like Aubrey only pay in about $6,400 to social security per year, despite the fact that this is supposed to be a "Flat and fair" tax which republicans claim they can't wait to enact. How is it fair for someone to make $20 million, and pay 1/1000 of 1 percent into social security, pay the same dollar amount in as one of their corporate accountants who pays 6.2 percent, and the poor slob who works at Wal Mart making $12,000 per year is still expected to kick in 6.2 percent. If everyone paid the same rate, the rate for EVERYONE could be lowered below 4 percent, and Social Security and Medicare would be solvent forever, and a universal healthcare program could be largely funded as well. 90 percent of Americans are in fact subsidizing a welfare program for the richest 10 percent, who own 80 percent of everything already. Stupid laws such as this are ensuring that the rich get richer, and everyone else suffers when we are forced to pick up the slack.

  • Report this Comment On October 07, 2011, at 4:50 PM, MarionContrarian wrote:

    There's a way for "disgruntled shareholders" to vote their displeasure with McClendon and the board:

    Place a sell order with your broker and find an alternative investment for your dollars. And if you're really unhappy, borrow someone else's shares and sell those (short), too!

    Disclosure: No positions.

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