The Creepiest Thing About Chesapeake Energy

Chesapeake Energy (NYSE: CHK  ) has made news with some big corporate governance changes. These include controversial CEO Aubrey McClendon's voluntarily forgoing his annual bonus for 2012, which was by no means a good year for the energy company.

These changes are certainly newsworthy given the company's well-publicized struggles over the last year, centered around McClendon's behavior. They're also long overdue. Some of us have suspected things were amiss at Chesapeake and in its board's treatment of management for years, but many investors shrugged off the implications.

This brings me to another observation: The creepiest thing about Chesapeake Energy is that several years ago, unless you were a major corporate governance watcher, the company might have looked like a pretty darn socially responsible energy company.

Creepy history
Yesterday, The Wall Street Journal reported the changes Chesapeake revealed in a recent Securities and Exchange Commission filing. For years, McClendon received a $2 million cash bonus in addition to his salary, like clockwork. He has decided to relinquish that for 2012, and his personal use of the corporate jet will be limited.

Chesapeake will cut costs like political spending (quite a good expense to cut, given the circumstances), as well as charitable contributions.

In a major victory of corporate governance proponents, Chesapeake's board also allows shareholders, which include activist Carl Icahn and Southeastern Asset Management, to nominate some directors.

Of course, longtime shareholders should wonder if it will ever be enough. McClendon's behavior at Chesapeake has long been controversial, and the company grew increasingly indebted as the situation took a downward spiral.

Last year's ultimate outrage centered on McClendon's borrowing money from companies that Chesapeake was doing business with, as well as allegations he ran a secret $200 million hedge fund, among other shady dealings.

Still, McClendon-centric behavior isn't a new development at Chesapeake. In 2008, McClendon received a whopping $75 million bonus, dubbed the "well cost incentive award," and also gained notoriety in corporate governance circles for having made an arrangement with Chesapeake through which the company would buy his collection of antique maps for $12 million. To say that's unusual is an understatement. These deals actually made McClendon whole after he lost his stockholdings due to a margin call. (He later bought back the maps.)

How could so much good go so bad?
So what was I saying about social responsibility? Well, the funny thing is, there appear to be some "nice" things about Chesapeake.

First of all, many natural proponents point out that regardless of the controversy surrounding fracking, natural gas is actually a pretty darn green energy source.

Last year, Chesapeake landed at No.18 on Fortune's annual 100 Best Companies to Work For list. Some perks employees enjoy include a child care facility on the company's headquarters, which is described as "perk-filled."

Last spring, the Journal ran a detailed article on an unexpected side of Chesapeake's issues: the impact that Chesapeake Energy under Aubrey McClendon has had on Oklahoma City. Such actions included "showering arts groups and schools with millions in donations," to the point where "charities and civic leaders are fretting about potential consequences to the city" as the controversy deepened.

Even more thought-provoking, the article describes McClendon and Chesapeake as having spread "a culture of giving," which included the company's executives making donations to worthy causes and employees having a tendency for volunteerism.

Between 2010 and 2011, Chesapeake Energy shelled out $56 million in charitable contributions. (Granted, this cost pales in comparison to the company's lobbying expenditures.)

Setting the stage
That's an awful lot of good going on for a company where some bad business was taking place behind the scenes.

Then again, from an environmental/social/governance (ESG) angle, such situations can be confusing. Take Wal-Mart's (NYSE: WMT  ) forays into environmentally sound practices, which have even won over some hardcore environmentalists. In 2011, Wal-Mart proclaims that it and its foundation gave $958.8 million in cash and in-kind donations across the globe.

In fact, last year The Chronicle of Philanthropy lauded Wal-Mart and another company that's often not considered too terribly socially responsible, financial giant Goldman Sachs (NYSE: GS  ) , for being the biggest of 2011's corporate cash givers. (Incidentally, Goldman Sachs came in at No. 33 on Fortune's 100 Best Companies to Work For list.)

In another example, tobacco giant Altria (NYSE: MO  ) touts its $1.3 billion in donations over the last decade, and describes its focus on arts and culture, education, sustainability, and positive youth development on its website.

Peeking behind the window dressing
Those of us who are interested in socially responsible companies are faced daily by the idea that there are no perfect companies. Fortunately, many are trying to improve, and although some PR-polishing and greenwashing exists, I believe some managements' efforts are genuine or are even starting to recognize the good business sense some positive changes make.

However, cases like Chesapeake's reveal the need to do one's homework. Perhaps the better the window dressing is, the more criticism we should apply to public companies. Chesapeake Energy's veneer of good works hid a secret inner core that enriched management over shareholders, and now, this has put its previous do-gooding into danger.

Chesapeake's situation reminds us that responsible investing requires a lot of vigilance -- and a lot of thought. It's a reminder that responsible management matters as well, and negative impacts can spread much further than shareholders' portfolios.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

Editor's note: A previous version of this article stated that McClendon used company resources to run his hedge fund. The Fool regrets the error.


Read/Post Comments (11) | Recommend This Article (9)

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 January 09, 2013, at 5:36 PM, smartmuffin wrote:

    Didn't Enron also win awards for transparency?

    "Social responsibility" is a meaningless buzzword. There are always metrics for it that companies are aware of and know how to game. Meanwhile, the various shenanigans that CEOs like McClendon are up to usually aren't discovered until after the fact, or they are fairly arbitrary/random occurances that don't show up the official "social responsibility scorecard."

    I wouldn't be surprised if many companies are counting their "social responsibility" initiatives as advertising expense, becuase in the end, that's all it really is. Throwing around a bunch of money for the sole purpose of getting people to think more highly of your company.

  • Report this Comment On January 09, 2013, at 6:33 PM, XMFSMurph wrote:

    Excellent article as always, Alyce. My thoughts exactly. Thanks for continuing to cover the deeper and more thoughtful aspects of responsible investing.

  • Report this Comment On January 09, 2013, at 8:15 PM, GirlsUnder30 wrote:

    In July of 2012, I blogged about the 'pending doom at Chesapeake' in [url=http://caps.fool.com/Blogs/the-pending-doom-at-chesapeake/74... article. I am very surprised that Alyce neglected to give us an update on the numerous filings for breach of contract against Chesapeake for properties it made covenants to purchase and then backed out of.

  • Report this Comment On January 09, 2013, at 9:29 PM, GirlsUnder30 wrote:
  • Report this Comment On January 09, 2013, at 10:09 PM, Clint35 wrote:

    McClendon still needs to go. Even after he goes the board will need to make serious changes. Do they still have a staggered board? Why are some shareholders like Icahn allowed to nominate board members and others aren't? That's what most people call special treatment.

  • Report this Comment On January 10, 2013, at 8:25 AM, Sotograndeman wrote:

    Typically superficial TMF article, largely recycling old news and eye-catching trivia. This time it was CHK's turn.

    I agree with smartmuffin on the term "social responsibility". The author is oblivious to how it's used to a company's advantage.

    I plead with TMF to stop turning out dozens of articles with different views and perspectives and judgements on a single company, and try to produce a few meaningful, thoughtful and robust articles.

  • Report this Comment On January 10, 2013, at 10:59 AM, GirlsUnder30 wrote:

    Will someone confirm that the link I posted above to my blog works properly. I keep getting a 'we may have goofed' error message. I agree with Sotograndeman that this article left too many questions unanswered. There is always an unsettling feeling when you own a company without any verified up to date information on what it is really doing with all the shareholder assets. I made an underperform CAPS call this summer after shorting the stock in real life and I think we will see even worse news forthcoming from the Chesapeakes.

  • Report this Comment On January 10, 2013, at 11:43 AM, threesat2000 wrote:

    "First of all, many natural proponents point out that regardless of the controversy surrounding fracking, natural gas is actually a pretty darn green energy source."

    This impresses me a glib discounting of very serious environmental issues. I'd certainly appreciate an explanation of how "natural gas is actually a pretty darn green energy source", given the strong arguments of the anitfracking crowd and the horrible environmental record of the frackers.

  • Report this Comment On January 10, 2013, at 12:52 PM, TMFLomax wrote:

    Hey everyone,

    GirlsUnder30, I was able to get to your blog post from the second link, FYI.

    smartmuffin, yes, Enron had a very good reputation... until it didn't. I don't agree that social responsibility is meaningless, although I do agree that it can be used for a company to make itself look better than it is (which is what this article is about, basically).

    Actually, I should go ahead and remind everyone that this article is actually my column on environmental, social, and governance issues (basically SRI) and as such, it is geared towards specifically addressing those issues (my column runs twice a week). It doesn't necessarily have to do with "breaking news," although these governance changes at CHK (including McClendon's decision to forego his 2012 bonus) ARE actually current news. So, shareholders, that's $2 million in saved expense, but that may be poor consolation given the last year or so of share price return as well as increased indebtedness at CHK and the uncertainty of these myriad issues.

    Clint35, I agree with you that McClendon should probably go. If you go look at the company's 8-K outlining the governance changes, it says it is trying to eliminate the classified board, which apparently is required of some companies incorporated in Oklahoma, and if it can't, the board is going to re-incorporate in Delaware. Proxy access is a big deal, and the issue there are requirements that shareholders own a certain percentage of shares, hold for a certain amount of time, etc. This is why proxy access is controversial; most corporate managements and boards would like NO proxy access, but the concession is to have those requirements so random shareholders with short-term intentions can't make proposals. I agree with you that it is not really fair (and have written about proxy access in the past).

    threesat2000, natural gas actually produces far less nasty emissions than coal or oil in generating electricity. So on that note, it is greener than other choices. You're right that there are other less environmentally aspects to natural gas.

    TMFSMurph, thanks for your support and for your following and writing about these investing issues, too!

    Thanks for the conversation, everyone.

    Best,

    Alyce

  • Report this Comment On January 11, 2013, at 12:20 PM, TripleEFocus1 wrote:

    Alyce, thanks for yet another helpful article. Keep em coming

  • Report this Comment On January 11, 2013, at 3:11 PM, bkoch47 wrote:

    I met Aubrey and his then CFO Marc Rowland in the late 90's when trying to do a deal to gather their gas in the woods/woodward area of Oklahoma. One thing about Aubrey he was always looking to drill his way to success. When others had pulled in their horns he was looking to drill more. I offered to resturcure a contract in return for up front money that they would use to drill wells. I remember my partner saying, "G.D. Bill, that's like throwing raw meat to a dog." Aubrey was and always will be a "landman" (i.e. a promoter). Using loopholes in forced pooling laws/regulations in Oklahoma he built a huge company. CHK rode up on the huge increase in the pricing of natural gas. The city OKC and the state and some charities enjoyed some of the results of success. When the market for nat gas dropped, CHK tried to promote their way to be more oily. The tide rolled out and we see who is swimming naked. I am sure CHK has good people and assets that were built along the way. I never invested in them after that meeting and that was to my financial detriment. CHK needs to turn the page and find a new leader who can take what has been built and focus it. No more bluster....just performance.

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