It Is Chesapeake's Board Of Directors That Needs To Go First

| About: Chesapeake Energy (CHK)
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I'm a Chesapeake Energy (NYSE:CHK) shareholder. As you may have guessed, I am a little disgruntled these days.

I'm sure you know why I'm disgruntled, but in case you don't here is my list of grievances:

  1. In 2008 with the world in financial chaos and heading into a very scary recession (and as far as we knew then, possibly depression) Chesapeake paid its CEO a bonus of $75 million. At a time when the capital markets were absolutely frozen and oil and gas prices plummeting, paying out this kind of cash was clearly not in the best interests of Chesapeake shareholders.
  2. Also in 2008 with the world in financial chaos, Chesapeake Energy bought a collection of antique maps from its CEO for $12 million. I don't actually work on a drilling rig, but I'm almost certain that an energy company does not need antique maps to operate.
  3. The above two items are ridiculous enough on their own, but are made even worse when you consider that they followed immediately after the CEO who was receiving the cash losing hundreds of millions of dollars because of margin calls triggered by the fall in CHK's stock price. It is hard not to conclude that the payments were an effort to improve the CEO's financial position.
  4. It has recently been revealed that Chesapeake's CEO has roughly $1 billion in personal debt that is secured by natural gas properties that he shares a small interest in with Chesapeake Energy through a Founders Well Participation Program. While I think the entire Founders Well plan is a ridiculous idea it has at least always been disclosed to shareholders. The billion dollars of personal debt has never been disclosed.
  5. It has also recently been revealed by Reuters that Chesapeake's CEO was involved with a hedge fund that traded in the very commodities that Chesapeake produces. How can it be anything but a conflict of interest for the CEO of one of the largest producers of natural gas to also separately and not on behalf of shareholders be involved with a hedge fund trading natural gas?

One at a time these issues stink. But if you put them all together the smell is absolutely rotten.

Not surprisingly, CEO McClendon has had his name dragged through the mud over the past few weeks. And given the list above and that I'm a Chesapeake shareholder, McClendon isn't likely to receive a Christmas card from me either.

But to be honest, my disappointment here is not so much because of McClendon as it is the Chesapeake Board of Directors. What have they been doing? How does one of the above happen, never mind the entire list?

I'm a father of two little girls. One is three years old and the other five. The wife and I head out to the odd movie and leave them with a babysitter. When we come home from the movies we find the babysitter on the couch watching the television and the kids asleep. She knows what her job is and does it well.

The situation at Chesapeake in my mind is comparable to my baby sitter and my two daughters. Aubrey being my kids, and the Board of Directors being the baby sitter.

In this case though with the Board of Directors being the baby sitter, when the wife and I come home from the movies we find the kids hanging from the ceiling drinking soft drinks and eating chocolate bars.

Aubrey is like a kid who likes candy. His candy is money. If I came home to find that the baby sitter had let my kids drink six Coca-colas, I wouldn't be mad at my kids. I'd be mad at the baby sitter. The baby sitter's job is to control the kids. Because everyone knows kids like candy and soft drinks.

Aubrey (like almost everyone) would like to be as rich as he possibly can be. I know if my boss came to me and offered me a $75 million bonus I wouldn't decline it on principal. So it is hard to entirely blame Aubrey. His baby sitter told him it was ok.

I'm a shareholder of Chesapeake Energy. I left for the movies at six-thirty and the baby-sitter who was watching my kid (Aubrey) let them eat and drink whatever he wanted. As a shareholder the first thing I would like to do is get rid of that baby sitter.

There is likely a strong case to be made that Aubrey should go. I think the entire Board of Directors has to go.

The Board of Directors is in place for one reason and one reason only. That is to protect the interests of shareholders. The Board of Directors did the right thing in kicking McClendon off the Board. Now is it time for them to do the right thing again, and get rid of themselves.

Give us (shareholders) a fresh start with an independent board who knows what their job is. After all, a parent has to be able to trust his baby-sitter if he is going to ever go to the movies again.

Disclosure: I am long CHK.