Time to Send Chesapeake a Message

Chesapeake Energy (NYSE: CHK  ) has caught a lot of heat this year for some controversial agreements and transactions with Aubrey McClendon, the company's founder, chairman, and CEO.

  • McClendon received a $75 million bonus at the end of 2008, which, combined with other sources, made him the best-compensated among S&P 500 CEOs.
  • The company purchased a collection of "museum quality" historical maps from Aubrey for $12.1 million (his cost basis).
  • Chesapeake sponsored the NBA's Oklahoma City Thunder, in which McClendon holds a nearly 20% interest.

The first two items, following quite closely on the heels of Aubrey's massive margin call, have drawn particularly harsh criticism. Chesapeake's general counsel even took the extraordinary step of responding to the swell of negative media coverage in a letter filed with the SEC.

Shareholder outrage has been expressed in several succeeding waves, and it has perhaps culminated with a recent announcement that the Ontario Teachers' Pension Plan is leading a lawsuit seeking to have Aubrey's bonus returned to the company. The suit alleges "breach of fiduciary duties of the care and loyalty; corporate waste, insider trading, and unjust enrichment."

Insider trading? That's a bit of a curveball. It is true that three directors sold more than $5 million worth of Chesapeake stock in the days before the Oct. 10th disclosure of Aubrey's forced sale of shares. In that time period, the stock fell by roughly $10 per share.

Although it's not clear that this lawsuit will go anywhere, it does send a strong message to the board that shareholders aren't totally asleep here. To drive that point home, the teachers' fund has also announced its intention to withhold votes for "conflicted directors" and to vote in favor of two board-opposed shareholder proposals that are intended to improve Chesapeake's corporate governance.

Maybe Aubrey McClendon deserves the bonus he received last year for his part in securing joint-venture deals with BP (NYSE: BP  ) , Plains Exploration & Production (NYSE: PXP  ) , and StatoilHydro (NYSE: STO  ) . Maybe he doesn't. You, as a shareholder, don't have a say on that one.

When it comes to Chesapeake's opposition to both declassifying its board and allowing for majority voting of directors, you do have a chance to demand governance improvements with your proxy vote. Devon Energy (NYSE: DVN  ) , XTO Energy (NYSE: XTO  ) , and Anadarko Petroleum (NYSE: APC  ) are all destaggering their boards, and so should Chesapeake. Vote for the shareholder proposals, think twice about re-electing the board nominees, and send a clear message this Friday.

Chesapeake Energy is an Inside Value selection. StatoilHydro is an Income Investor recommendation. Saddle up with any of our subscriber newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


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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 June 10, 2009, at 6:28 PM, TMFAdmiral wrote:

    South Eastern Asset Management is a highly respected asset management company which includes the famous Longleaf Partners Fund run by Mason Hawkins. The President, Staley Cates has a completely opposite take to the general media view on McLendon's recent compensation award

    http://seekingalpha.com/article/138854-staley-cate...

    Most recently, like in the last week or so, Chesapeake and Aubrey McClendon are hitting all these compensation lists for highly paid CEOs. There are two big misconceptions in the current discussion around McClendon being number one on that list. First, the payment of 75 million bucks to him is a lump sum allowance towards drilling that applies to the next five years. In other words, it should be viewed as 15 million per year, not 75 million in one year. While in societal terms, of course that’s absurd compared to what teachers make, but it’s less than all of his peers at similar companies like XTO and Devon. But the second point and the most important is the concept of pay for performance. Many of the people in the highly paid list did poor jobs in 2008 and did nothing to de-risk their companies where things, when things were good. By contrast, McClendon made shareholders about 30 billion dollars on three of his big four shale plays. He had paid 4.6 billion for three shale play land positions and last year he sold less than a third of those for 8.6 billion, which implicitly valued what they kept at 25.9 billion. In addition to highlighting 30 billion dollars of value created, these sales brough in a lot of cash to de-risk the balance sheet. Because gas prices plunged in ‘08, his stock did poorly, then it did even worse when his big margin call took him out. At no point did he endanger the company with his bad personal decision, and he certainly couldn’t control gas prices. Over the long term, his company has built the most per share value of almost any company in the world. So for this, it’s probably okay to pay him industry average, but his Board has framed this poorly, then they made smaller bad decisions on peripheral compensation that muddied the water. The bottom line is this is a fantastic company, he has done a terrific job, and if you were on that comp committee, you would have leaned towards rewarding him handsomely for his 2008 performance.

    Regards

    Philip

  • Report this Comment On June 10, 2009, at 10:33 PM, Graham1Dodd wrote:

    Even the best CEO in the world should be overseen by a Board that is independent of management and with a Chair that is NOT the CEO. That is not the case with CHK. The board earns very high fees, in excess of $600k/yr (in stock and cash) and get 40 hours/yr of time on the corporate jet for personal use. One director is a first cousin of the CEO and another director's son and daughter-in-law are employed by CHK.

    Given all of the above do you think the Board members will challenge the CEO and risk losing all of the above privileges? Also note that several of the Board members are former politicians and one is the Prez of OK State Univ. To these folks (and almost everyone else) $600k+ is a lot of cash and they won't want to risk losing it.

    In addition shareholders should have the right to elect all directors every year and they should be able to vote against potential Board members, not just vote for or withhold.

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