Chesapeake Energy Explains, But Ignorant Shareholders Just Don't Get It

A truly amazing letter by the Chesapeake Energy (CHK) general counsel ("GC") is making the rounds among investors concerned with public companies' corporate governance practices. While we have not followed CHK's corporate actions to date, the above-linked letter caught our attention.

In the letter, CHK's GC attempts to justify paying a $75 million bonus to CEO Aubrey McClendon in 2008, a year in which Chesapeake's stock price declined by an impressive 59%. Mr. McClendon's total compensation during such a notable year? 100 million sixty-nine thousand two hundred and one U.S. dollars (see it for yourself in CHK's proxy statement).

As if the compensation issue was not sufficient, the GC felt it necessary to justify another use of corporate funds as follows:

In December 2008, the Company purchased an extensive collection of antique historical maps of the American Southwest from [CEO] Aubrey [McClendon] for $12.1 million, which represented his cost. The collection includes over 500 museum quality pieces. A dealer who had assisted Aubrey in acquiring this collection over a period of six years advised the Company that the replacement value of the collection in December 2008 exceeded the purchase price by more than $8 million. The maps have been displayed at the Company's Oklahoma City headquarters for a number of years, during which the Company has been insuring the maps in exchange for their display.

We are relieved that they bought "museum quality" pieces. Anything less would have been a waste of shareholder funds.

Least but not last, the GC explains another use of corporate funds as follows:

In 2008, the Company paid Deep Fork Catering approximately $177,000 for food and beverage catering services, primarily for two large events sponsored by the Company. Deep Fork Catering is an affiliate of the Deep Fork Grill, an Oklahoma City restaurant in which [CEO] Aubrey [McClendon] is a 49.7% owner. Aubrey is not involved in decisions to hire Deep Fork Catering and has requested that the Company’s future use of Deep Fork Catering be limited.

How could anyone think that McClendon might be "involved" in hiring his own catering company? Don't these ignorant shareholders know that there are only a handful of catering companies around in Oklahoma City? Besides, isn't it reassuring that McClendon wants future hirings to be "limited"? They will surely not exceed CHK's cash balance and borrowing capacity, so what's the big deal?

Last but not least, the GC indulges shareholders with another wholly unnecessary explanation of a surely optimal use of shareholder funds:

In 2008, the Company became a founding sponsor of the Oklahoma City Thunder, a National Basketball Association franchise owned and operated by The Professional Basketball Club, LLC ("PBC"). [CEO] Aubrey [McClendon] has a 19.2% equity interest in and is a non-management member of the PBC. The Company paid $3.5 million in 2008 and $1.2 million in 2009 pursuant to its sponsorship agreement for the Thunder’s 2008-2009 season. As a founding sponsor, the Company received valuable television and radio advertising for local broadcasts of Thunder games, arena advertising space, advertising in game-day programs and on the team website, team participation in a Company-sponsored community event, game tickets and use of an arena suite. Our sponsorship level is consistent with that of other major employers in Oklahoma City, some of which also have ownership ties to the franchise. In addition to the advertising and promotional activities related to its sponsorship of the Thunder, the Company believes the sponsorship provides valuable support to the local community and contributes to employee morale.

We don't doubt for a second that it contributes to the morale of at least one employee. Go Aubrey!

Disclosure: No position (you seem surprised)

Comments

[robert99:]

Wow. I am a CHK shareholder, but after reading this article, I am considering selling those shares. These expenditures are ridiculous - especially Aubrey's bonus.

May 17 07:36 AM

[schnickelfritz:]

Hey, somebody (obviously the unfortunate and unknowing stockholders) has to make up for that huge margin call and subsequent loss recently.
How outrageous!! And hasn't Cramer been worshiping at the CHK alter, too?

May 17 09:32 AM

[User 283977:]

Buccaneer McClendon (Bucky) and his band of merry men, his board of directors, have no business running a pubic company. As a former shareholder of CHK, I got tired of Bucky's surprises. That is why I no longer own CHK. Buck and his merry men appear to make no distinction between their money and the shareholders money. Its all one big treasure chest to them. How else can these outrageous expenditures be justified. Purchasing services and providing shareholder funds to companies that Buck is financially involved with raises questions with respect to "conflict of interest" and "fiduciary responsibility". Add to that a 100 million dollar (!) compensation package including a 75 million dollar bonus when the stock price declined by 60% and the word PLUNDER comes to mind.

I guess if you are a day trader, trust in management is irrelevant. But for long positions, trust in executive management is paramount. Every now and then I look at CHK's stock price, and think about it, but then, in my minds eye I see the Jolly Roger flying over their corporate headquarters and I check my wallet to make sure its still there. The best thing I can say about Bucky and his board of directors is that they are usually successful with respect to their rapacious piratical behaviour. Unfortunately, CHK's shareholders are their primary victims.
Clearly no one in corporate governance is concerned.

May 17 09:40 AM

[Rappenco:]

McClendon is a prime example of the crookery going on in Corporate America these days. I dumped these shares the minute I learned he was one of the primary backers of the Swiftboaters. He paid himself the exact amount he lost on purchasing CHK stock last year. He bought on margin 750 thousand shares only to get a margin call when the stock fell towards single digit territory. The guy is an absolute crook.


On May 17 09:40 AM User 283977 wrote:

> Buccaneer McClendon (Bucky) and his band of merry men, his board
> of directors, have no business running a pubic company. As a former
> shareholder of CHK, I got tired of Bucky's surprises. That is why
> I no longer own CHK. Buck and his merry men appear to make no distinction
> between their money and the shareholders money. Its all one big treasure
> chest to them. How else can these outrageous expenditures be justified.
> Purchasing services and providing shareholder funds to companies
> that Buck is financially involved with raises questions with respect
> to "conflict of interest" and "fiduciary responsibility". Add to
> that a 100 million dollar (!) compensation package including a 75
> million dollar bonus when the stock price declined by 60% and the
> word PLUNDER comes to mind.
>
> I guess if you are a day trader, trust in management is irrelevant.
> But for long positions, trust in executive management is paramount.
> Every now and then I look at CHK's stock price, and think about it,
> but then, in my minds eye I see the Jolly Roger flying over their
> corporate headquarters and I check my wallet to make sure its still
> there. The best thing I can say about Bucky and his board of directors
> is that they are usually successful with respect to their rapacious
> piratical behaviour. Unfortunately, CHK's shareholders are their
> primary victims.
> Clearly no one in corporate governance is concerned.

May 17 09:58 AM

[calisdad:]

McClendon has been abusing his shareholders, responsibilities and close friends for years. Anyone who invests in CHK gets what they deserve.

May 17 10:15 AM

[bebido:]

The solution is very simple. Vote the SOB's OUT!

No, when the proxies are received by the share holders the proxies will simply be discarded.

May 17 10:54 AM

[notsosmart:]

just dump the stock.its all scam/ponzi & the sec is powerless.i never went near this dog & others.dont listen to the talking heads on tv.they all have an agenda.think for yourself.dont trust anyone about anything.the crooks & scoundrels abound supported by the selfserving boards.the shareholder is a piece of crap.

May 17 01:24 PM

[Windsun33:]

This info is not new, but has just recently started getting some traction. I first found out about it about 3 months ago, and sold what little stock I had left in CHK.

I now recommend it as a "strong sell", as being Enron, part 2 :)

May 17 01:34 PM

[Windsun33:]

Quote from Marketfolly.com
"1. Chesapeake Energy - CHK: Aubrey McClendon made around $2,008,928 for every 1% his stock dropped, giving him a total salary package of $112.5 million based on CHK shares being down around 56% for 2008..."

May 17 01:44 PM

[Nathaniel C:]

What's ironic about this kind of corporate looting is that it is legal. Aubrey should be arrested for this kind of corporate misconduct. I would love to see him in handcuffs escorted by Federal Marshals. No one deserves it more!!!

May 18 03:36 AM

[416431:]

thanks for pointing out this ridiculous use of shareholder $. But, in the future, when you cut and paste a document, please do so accurately so as not to damage your own credibility. ".....has requested that the Company’s future use of Deep Fork Catering be eliminated", not limited, as in your repost of the proxy statement.

May 19 10:03 AM

[416431:]

i apologize for the recent post. just saw that the letter by the GC does not agree with the statement in the proxy. eliminated v. limited.
All the more reason to avoid this company.

May 19 10:07 AM

[Dr. O:]

CHK has smelled scammy to me for years. The CEO publicly announces large stock purchases buoying the stock price over a period of rising prices. When the market collapses it is reported he faced "margin calls" and he dumped all his stock. Months later he was paid over 100 million in cash. Scammy.

Jun 29 08:13 PM