Aubrey McClendon Needs to Go

Saying I'm frustrated with Aubrey McClendon is putting it mildly.

McClendon, the CEO of natural gas giant Chesapeake Energy (NYSE: CHK  ) , was making headlines again today as Reuters revealed that he was running a $200 million commodities hedge fund. This follows on the heels of a Reuters report last month detailing more than $1 billion in loans that McClendon took out against the stakes he owns in Chesapeake wells.

In response to the previous Reuters expose, Chesapeake stripped McClendon of his chairmanship and agreed to end the Founders Well Participation Program -- the cozy deal at the center of McClendon's $1 billion borrowing spree -- early. Originally, the FWPP was scheduled to run through 2015, but it will now end in June 2014.

But these steps aren't enough. There's only one solution to the problem: Aubrey McClendon needs to go. Now.

That's easier said than done. McClendon is not only CEO, but also a founder of the company and, thanks to that FWPP, a part owner of many Chesapeake wells. To many, McClendon is Chesapeake.

On the other hand, thanks to gambling away most his shareholdings with huge amounts of margin borrowing, McClendon is a very small Chesapeake shareholder at this point. According to recent filings, McClendon owns less than 0.3% of Chesapeake's outstanding shares. Meanwhile, his shenanigans have been dragging Chesapeake's name -- and stock -- through the mud. And while he apologized to shareholders for these "distractions," it's hard to consider any of this proper conduct for a public-company CEO.

But perhaps the bigger concern that few are talking about, is what this all means for the way that McClendon has been running Chesapeake. For one, a CEO's attention should be fixed on the company that he's supposedly leading -- not the smaller, personal well-ownership empire he's building or the hedge fund he's apparently running. Furthermore, almost everything coming out about McClendon underscores his sweet-tooth for gambling. A great piece from Jeff Goodell in Rolling Stone back in March speaks to this. Shareholders or potential shareholders should be sure to read that, but, in short, Goodell's conclusion is that McClendon's gambling streak has definitely shown up in Chesapeake's business approach.

Many investors have held onto the hope that the promise of natural gas would trump the poor governance and CEO excesses at Chesapeake. That has looked like a bad gamble to me for years, but today it looks downright scary.

That is, unless McClendon is replaced and a new regime is brought into this company.

Don't stop with McClendon
Public companies aren't structured so that the CEO can run the show. Sure, McClendon wielded a considerable amount of power when he was both CEO and chairman, but in a properly functioning company, the board of directors should be keeping a wild-child CEO in check.

That didn't happen at Chesapeake. In fact, as I see it, almost the exact opposite happened as the board catered to McClendon's needs, co-signed his desires, and bailed him out when he got in tight spots. And maybe it shouldn't be too surprising -- the environment in the boardroom seems like a pretty cozy one when on average board members are being compensated to the tune of $533,000 and getting use of the company's private jet.

So, not only does McClendon need to go, but so does most of the board.

Richard Davidson, Burns Hargis, Don Nickles, Frank Keating, and Pete Miller have all been on the board for more than a couple of years and have obviously done little to rein in McClendon in exchange for their princely directors' compensation. Unfortunately, because of Chesapeake's staggered board -- a shareholder-unfriendly practice that doesn't put all directors up for election at the same time -- only Davidson and Hargis are up for election this year. But replacing them would certainly be a start.

Don't look now, but McClendon has a buddy
Interestingly, in all of this coverage of Aubrey McClendon, very little of the harsh spotlight has fallen on his buddy and Chesapeake co-founder Tom Ward. Ward was president and COO of Chesapeake until early 2006, when he made the jump to take over SandRidge Energy (NYSE: SD  ) . Ward is currently the chairman and CEO of SandRidge.

According to Reuters, Ward was a partner and co-founder in the very hedge fund that's causing all of the noise around Chesapeake today. Even a quick leaf through SandRidge's proxy statement reveals much of the same clubby, "praise thy CEO" feel that has brought so many headaches to Chesapeake shareholders. Notably, though, SandRidge got rid of its version of the FWPP back in 2008.

In other words, while Aubrey McClendon may be taking a lot of heat here, SandRidge shareholders may want to gird themselves as well.

What you can do
Chesapeake has released a preliminary proxy statement (touting its great governance no less) that allows shareholders to get up to speed in preparation for voting. The annual meeting is June 8, and votes have to be in by June 6. Current shareholders can have their voice heard by voting and/or showing up at the annual meeting and sharing their thoughts.

In addition, three mutual fund companies -- Southeastern Asset Management, Wellington Management, and BlackRock (NYSE: BLK  ) -- currently own more than 25% of Chesapeake combined. Investors in these companies' funds can hit the phones and urge them to push Chesapeake for the wholesale reform that's needed to get the company on the right track.

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

Fool contributor Matt Koppenheffer does not have a financial interest in any of the 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.


Read/Post Comments (17) | Recommend This Article (49)

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 May 02, 2012, at 4:26 PM, Clint35 wrote:

    I agree Matt and I haven't even read your article yet. With a headline like that I'm sure it's good.

  • Report this Comment On May 02, 2012, at 4:26 PM, bunngolf wrote:

    I agree with all points. Time for all shareholders to become activists. The founder has lost the confidence of most shareholders and the board needs to take swifter action, or resign themselves.

  • Report this Comment On May 02, 2012, at 4:32 PM, Clint35 wrote:

    Yep, good article.

  • Report this Comment On May 02, 2012, at 4:56 PM, XMFAimeeD wrote:

    Another Reuters story that didn't get as much attention, but is also appalling:

    http://www.reuters.com/article/2011/12/28/us-energy-giant-id...

    Always avoided CHK because of McClendon...

    Nice article, Matt.

    Aimee

  • Report this Comment On May 02, 2012, at 6:27 PM, bear1010 wrote:

    I lost confidence in McClendon in 2008 when he was paid $ 21.1 million by CHK (with BOD approval) for his set of antuque maps. The BOD should have told him to sell his maps on Ebay. He probably would have got $ 50.00 for the lot.

  • Report this Comment On May 02, 2012, at 7:00 PM, KAD1963 wrote:

    McClendon's behavior and business ethics/practices are despicable; the height of greed. And the reason I never invested in CHK.

  • Report this Comment On May 02, 2012, at 7:08 PM, GETRICHSLOW2 wrote:

    AMEN brother Matt!!!! I am holding for now but wouldn't touch an further investment in CHK purely due to McClendon. The board is pathetic and I agree they need to go too.

  • Report this Comment On May 02, 2012, at 7:28 PM, nmartell22 wrote:

    What a crazy day for Chesapeake shareholders, was just reading on MarketSnacks about what the combination of poor earnings and the CEO scandal did to the stock:

    http://marketsnacks.com/2012/05/02/weak-reading-on-us-jobs-b...

  • Report this Comment On May 02, 2012, at 7:36 PM, TMFKopp wrote:

    Thanks all! Big props to Reuters here -- they did some excellent work unearthing all of this messiness.

    Matt

  • Report this Comment On May 02, 2012, at 7:42 PM, TMFBent wrote:

    I never understood why people were so attracted to this one. I was turned off by the complex accounting years ago, along with the sleazy CEO. What I don't get now is how so many people are so sure these assets are selling at such a discount. Really? Oh yeah, they're dead sure, as if natural gas assets have values set in stone and not based on, I don't know, a volatile commodity that hasn't gone up in price despite years of experts claiming it had to and, well, estimates of some kind. To believe this cheap asset story, you have to believe that there are 50 dollar bills strewn all over the ground in plain sight and for some reason half of Wall Street won't pick 'em up.

    That seeme pretty unlikely to me. For sure, Wall street misses out on some of this stuff sometimes, but not usually at giant companies that are in the headlines nonstop.

    Finally, I really wonder about the books at this place. Are we supposed to believe that the 3, 4 or 5 McClendon cockroaches are the last ones? And that there are no bugs in the books? A guy with a history of bad risk-taking, me-first, secret double dealing, and we're supposed to trust that it extends only to his personal fortune and ex-Chessy behavior, that the accounting has been good all these years?

    If you believe that, I have a fracked Pennsylvania farmland gas well to sell you, with a bonus water well that can be ignited as a backup home heating source.

  • Report this Comment On May 02, 2012, at 9:40 PM, Bujutsu wrote:

    Aubrey McClendon certainly needs to be removed. He is a complete disgrace to Chesapeake. I am so thankful that I never invested in CHK!

    Bujutsu

  • Report this Comment On May 02, 2012, at 10:26 PM, TMFKopp wrote:

    @TMFBent

    "Finally, I really wonder about the books at this place. Are we supposed to believe that the 3, 4 or 5 McClendon cockroaches are the last ones? And that there are no bugs in the books? A guy with a history of bad risk-taking, me-first, secret double dealing, and we're supposed to trust that it extends only to his personal fortune and ex-Chessy behavior, that the accounting has been good all these years?"

    My thoughts exactly. It would surprise me exactly 0% if there is more to come in this story. Nor would it be surprising if what we've heard so far is the least of it.

    Add this to a long list of powerful people whose hubris and narcissism made them think that they could do whatever they wanted.

    Matt

  • Report this Comment On May 03, 2012, at 7:51 AM, billjam wrote:

    The entire board of directors need to go! Another case of executive greed run amuck with the cooperation of the people who are supposed to be overseeing and protecting shareholders' interests. Absolutely disgusting.

  • Report this Comment On May 03, 2012, at 1:09 PM, derrickhand300 wrote:

    Lets not forget that the BOD gave Aubery a 120 million dollar bonus the same year the stock went from $74 to $9-same year he liqyidated 30 million shares contributing to the crash...then they bought the maps....

  • Report this Comment On May 03, 2012, at 3:05 PM, onetopfish wrote:

    Yes, what McClendon did might have been unethical and illegal if he was front-running. However, I don't believe that shareholders of SD should be punished for Tom Ward's involvement. The statement bunngolf made that shareholders should become activists shows complete ignorance to the situation. So, for the responders of this article who want to protect the "little man" via name calling and think the leadership of these respective companies should be roasted on a spit, are doing nothing but hurting the shareholders. As we've seen the past three years, more damage has been done by novice and institutional investors who trade on news headlines as opposed to the actual fundamentals of the companies they buy and sell. Look at SD the past two days. Down over 9% yesterday and 4% today. Hmmmm, aren't earnings being reported AFTER close tonight?

    Thank God for the Capitalist pigs and the greedy "cockroaches" that make millions heading these companies! The people who've exhibited "corporate greed" have helped the "little" investor like me fatten my wallet and help me retire 20 years before having to rely on SSI.

    SD shareholders should NOT take the brunt of this.

  • Report this Comment On May 04, 2012, at 3:17 PM, FoolTheRest wrote:

    LOL! Well, Seth, how do you really feel? Nice visuals!

  • Report this Comment On May 04, 2012, at 3:24 PM, foolroy59 wrote:

    No one mentions his long range plan for building this company out of today's product pricing using financing from assets....selling large future production at above today's prices to foreign customers....while building Chessie HQ and field HQs to maintain long term presence in each of the many major fields where nat gas and oil is found. His leading innovative methods are understood by his BOD, who are all of high character and ability as shown in each of their own fields.

    I just bot more CHK on the price drop yesterday because of my faith in the man and his chosen ones.....If he is greedy, then I am too...Those who throw stones should not live in glass houses.

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