On May 3, 2012 I wrote an article for Seeking Alpha titled "A Look at Chesapeake Energy's Board of Director Compensation." 
As you may have already guessed, I was not arguing that the Chesapeake (CHK) Board was underpaid. My conclusion was basically this: On an hourly basis, that would suggest each board member is getting paid $500,000 / 24 hours = $20,833 per hour. And I thought I was overpaid.
As a shareholder, I'm paying $20,833 per hour to board members who, in my opinion, have helped create the current massive undervaluation in Chesapeake's stock price today by not putting shareholder interests before the interests of the CEO of the company.
Late last week Chesapeake came out with a press release. That press release revealed the following compensation reduction for its Board of Directors:
OKLAHOMA CITY--(BUSINESS WIRE)--May. 18, 2012-- The Board of Directors of Chesapeake Energy Corporation today announced that it has adopted a new compensation arrangement for outside directors that reduces compensation by approximately 20% and eliminates the use of fractionally owned aircraft for personal travel by outside directors. The Board has taken this action in consultation with an independent compensation advisor as part of a broader review of the company's executive compensation programs. As noted in Chesapeake's recently filed proxy statement, the Board had been reviewing its compensation for 2012 and beyond and today's announcement completes that review process for the Board's compensation arrangements. The proxy statement also discloses that the company has implemented a number of changes to its executive compensation program, including reducing the Chief Executive Officer's compensation for 2011 and better aligning the entire executive management team's compensation with company performance for 2012 and beyond, as well as retaining an independent compensation advisor for the Board's Compensation Committee.
Under the new Board compensation arrangement, which is effective immediately, outside directors will receive total annual compensation of $350,000, comprised of a $100,000 cash component and a $250,000 equity component. This reduces director compensation to a level at or below the average director compensation of the company's peers.
Could it be that the Chesapeake Board did this because it was listening to me? I have no doubt that they were listening, but I don't think they were listening to little old me. I think they have been forced to listen to a large number of very unhappy shareholders.
I'm glad that they are listening. But I don't think they have fully received the message. Because the message isn't that we (shareholders) want the Board of Directors to take a pay cut and to try and do better going forward. The message is that we (shareholders) don't want the current Board members to represent us anymore. The current Board has lost our trust, and we want new representatives in place to protect our interests and regain the trust of investors everywhere.
Maybe the Chesapeake Board would like to hear from another shareholder that shares my opinion. Well how about the Comptroller of the City of New York who wrote this letter urging shareholders to vote out the Directors who stand for re-election this year. Among the concerns raised by Comptroller Liu are:
- Mr. McClendon received over $1 billion in previously undisclosed loans in the last three years secured by his stake in Chesapeake's oil and gas wells, including from firms doing business with Chesapeake; the board was "generally aware" of the loans, but neither reviewed nor approved them (Reuters, 4/18/12; Chesapeake, 4/26/12).
- The Securities and Exchange Commission (SEC) opened an informal inquiry into the Founders Well Participation Plan (FWPP), which allows Mr. McClendon to invest in company wells, and the Internal Revenue Service is also looking into this unusual plan (Chesapeake, 5/4/12 Form 8K; 5/11/12 proxy statement).
- Mr. McClendon reportedly ran a $200 million hedge fund from 2004 to 2008 that traded in the same commodities that Chesapeake produces (Reuters, 5/2/12).
- Frederick Whittemore, who served on the board and its compensation committee from 1993 to 2011, reportedly provided loans to Mr. McClendon in the late 1990s; the undisclosed relationship reinforces longstanding board independence concerns (Reuters, 4/27/12).
- Chesapeake reportedly has $1.4 billion in off-balance-sheet debt in the form of volumetric production payments (VPPs), which are essentially debt that is repaid in fuel rather than cash; prior to the report, most analysts had estimated the total VPP liabilities at less than $600 million (Wall Street Journal, 5/10/12).
And that list doesn't even include the fact that this Board granted CEO McClendon an outrageous $75 million bonus at the end of 2008 in the midst of a financial panic when anyone with common sense was tightening his wallet, or the fact that this Board is so tone deaf that it thought paying McClendon $12 million for a map collection when he was in tough financial shape was appropriate.
A pay cut isn't going to do it. A multi-year run of not looking out for shareholders should seal the fate of this Board. It is time to put some people in charge to help maximize shareholder value, not executive compensation.
I'm a shareholder who used his own hard earned money to buy Chesapeake shares. I want this Board to hear what I have to say.
Disclosure: I am long CHK.
