(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."
Employing Relatives
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.
Director Loan
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.