(Bloomberg News) Chesapeake Energy Corp.'s decision to cut directors' pay and other perks may save the company up to $1.65 million a year without addressing investors' concern that the board failed to rein in Chief Executive Officer Aubrey McClendon's borrowing and spending spree.
The board's history of close ties to McClendon, of being paid more than directors at similarly sized energy companies and of rewarding the CEO even as Chesapeake plunged in value may hinder its ability to oversee a turnaround of the company.
The company's flip flop on how much it knew about a program it approved that allowed McClendon to acquire a 2.5 percent share in each of the company's wells -- and amass more than $846 million in debt from companies and banks also doing business with Chesapeake -- has sparked demands from some investors for new directors.
"They had an obligation to make themselves fully aware, to review and disclose these transactions," said Michael Garland, executive director of governance for the New York City Comptroller, who controls pension funds that own 1.9 million Chesapeake shares and has proposed shareholders replace two of the board's outside directors at the annual meeting next month. "The board has repeatedly failed to exercise independent oversight," Garland said. Now, "They're circling the wagons."
Chesapeake has business ties to some of its eight outside directors, who've received benefits aside from their compensation, according to a Bloomberg review of past disclosures. Those benefits include hiring a director's relatives, donating millions of dollars to the university overseen by a board member, and doing business with a company headed by its lead director.
National Oilwell Varco Inc., a drilling equipment maker headed by lead director Merrill A. "Pete" Miller, has been paid more than $343 million by Chesapeake since 2009, according to a Chesapeake filing with the U.S. Securities & Exchange Commission.
The son and daughter-in-law of Frank Keating, a former Oklahoma governor and a Chesapeake director since 2003, worked for Chesapeake in real estate and land acquisition roles. Chip Keating was paid $251,515 in 2009 for working in real estate development for the company, according to a company filing.
Chesapeake has given more than $10 million in funding to the Oklahoma State University system, and board member Burns Hargis has been president of its flagship campus since 2008. The company has helped fund a new business school, a natural-gas training center, an endowed faculty chair, student scholarships and tickets for sporting events, according to filings and university publications.
Chesapeake also did business with BOK Financial Corp., where Hargis served as vice chairman and is now a director.
BOK is controlled by Tulsa billionaire George Kaiser. In May 2009, Kaiser filed a notice in Oklahoma County that he had lent money to McClendon and his wife. The loan was secured by their interests in two companies, including the entity that holds most of McClendon's well interests, the filing shows. It doesn't show the amount of the debt.
Frederick Whittemore, a director of the company from 1993 to 2011, loaned money to McClendon against his personal interests in the Chesapeake wells in 1998, according to an Oklahoma County filing.
Trusts benefiting siblings of another previous board member, Breene Kerr, were paid $6.39 million by Chesapeake in 2007 for oil and gas royalty interests on more than 5,750 net mineral acres. Kerr could not be reached for comment.
Question Of Independence
While none of these relationships are illegal or exceed the rules set by the New York Stock Exchange, they raise doubts about the board's independence, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark.
"The modern trend is to avoid such questions," Elson said. "Directors shouldn't be in a position where they have to be asked" about their objectivity.