I don't find it easy to invest in publicly traded securities. No matter how many annual reports and regulatory filings you read as an outside investor you are always going to rely on management to represent your best interests.
Because of that I've always tried to avoid companies that are run by professional managers, people who have worked their way up to the top through the corporate ladder. In my mind, for those folks when they go to work every day they are going to a job.
The companies that I try to invest in are the ones that are run by the same person that founded the company. I want someone with his or her personal net worth aligned with mine. I want someone who goes to the office every day because he or she is an entrepreneur and has their heart and soul tied up in what they are doing.
I have a soft spot for the entrepreneurial CEO who risked his or her own capital and created a business. So when I saw that hedge fund TPG-Axon was looking to force Sandridge Energy (SD) CEO Tom Ward out of his job I felt a little sad.
I'd followed the Chesapeake Energy (CHK) saga where Chairman and CEO Aubrey McClendon had come under fire for compensation packages that were clearly out of line. I didn't feel sad for Aubrey, as an off and on shareholder I knew he deserved a comeuppance. I wasn't so sure Tom Ward deserved a similar treatment.
So I dug into the letter that TPG wrote to the Sandridge board to educate myself on the concerns they had about compensation practices at Sandridge. I was embarrassed that I wasn't already more aware of what I found.
Here are the most disturbing parts raised by TPG:
- One fact summarizes the appalling corporate governance practices of SandRidge - despite the single worst stock performance of any energy company, and among the worst stock performances in the entire US market, and massive discounts applied to the company because of management…payments to Mr. Ward from the company have totaled approximately $150 million over the past five years (astonishing, given the $3 billion market capitalization of the company).
- The most disturbing example has been the Executive Well Participation Plan, (similar to the founder well participation policy at Chesapeake Energy that caused enormous outrage earlier this year). When concerns regarding Mr. Ward's ties to Chesapeake Energy arose this spring, Mr. Ward repeatedly asserted to us, other shareholders, and the media that SandRidge was different, and that over time he and the company recognized the inappropriateness of this practice, and eliminated it to avoid any appearance of impropriety. We investigated his claims, and were appalled by what we found. It is true that SandRidge has eliminated their Executive Well Participation Plan. However, they did so immediately after the market collapse in October 2008, by then paying over $67 million to Mr. Ward, even as 1) markets were collapsing, and 2) the company had less than $1 million in cash and was facing real risk of bankruptcy. Adding insult to injury, the wells that the company re-purchased from Ward were natural gas wells, even as Mr. Ward and the company were publicly proclaiming the need to abandon their natural gas focus and shift towards oil exploration and development. When the company disclosed the purchase, it cited a desire "to retain a greater working interest in future wells, thus increasing proved undeveloped reserves". This declaration was preposterous, considering their publicly stated desire to abandon the initial natural gas focus of the company and switch to oil. And, again, it was even more shocking when one considers the environment of that time - with markets collapsing, the company facing collapse, and natural gas facing collapse.
- What has Mr. Ward done with his wealth, including the $150 million in payments from SandRidge? He has bought massive holdings of ranchland, and then turned around and leased the land to SandRidge for future exploration. Therefore, some payments to Mr. Ward continue - they have simply changed form. Cashing out of natural gas wells in October 2008 was a spectacular trade, as was swapping into ranchland in the Midwest … unfortunately at the expense of SandRidge shareholders who suffered massive write-downs on the well interests purchased from Mr. Ward.
Like I was with Chesapeake I am simply aghast at how out of touch with reality the Sandridge Board of Directors must be to think that these sorts of things are acceptable.
Sandridge's share price has gone from $65 in 2008 to $5 today, yet the top executive of the company has been paid $150 million. What sort of incentive plan is this? What sort of bonus would this Board of Directors pay if the company went bankrupt?
And don't get me started about a $67 million cash payment in October 2008 when anyone with common sense would have been doing everything possible to solidify the company's finances.
So I'm not going to shed any tears if Mr. Ward is a casualty of TPG's actions. Shareholders who have held shares while Sandridge has been under his watch have lost almost all of their investment. Mr. Ward has been paid $150 million for that service. He has done ok.
Perversely, I'm likely more interested in investing in Sandridge now than I have been in a while. Sandridge is never going back to $30 per share, but I believe that there is asset value in Sandridge well in excess of the current share price. The actions of TPG may well be the catalyst to make sure that value is realized and not destroyed.