Chesapeake's Well is Running DryAM
There are some things you simply can't do when running a company. CEO’s far and wide are trembling at the thought of putting pay packages up for vote to shareholders and investigations by the board into “personal misconduct.” Others like Aubrey McClendon do things like this gaffe from 2008.
Ever confident, McClendon doubled down: His personal balance sheet resembled Chesapeake's as he borrowed against his existing holdings to buy another 750,000 shares in that offering. Lousy timing: By October, as the economy imploded, with energy prices falling in lockstep, Chesapeake's stock price halved, and McClendon was hit with margin calls. As 30 million of his shares (more than 90% of his holdings) were liquidated, Chesapeake's share price halved yet again, down to $11. (A class action alleges the company didn't clarify the risks posed by McClendon's margin loans.) As his fortune vaporized, McClendon didn't flinch. "I never saw him blink," says Michael Stice, CEO of Chesapeake's pipeline company. "He was a rock."
As if getting called out of a company that you built from the ground up wasn’t enough, it seems that for many years he kept going back to the well for more.
The program, called the Founders Well Participation Program, came under assault from shareholders when it was discovered that CEO Aubrey McClendon used his shares in thousands of wells as collateral and leveraged more than $1 billion in personal loans.
As a clarification, McClendon was allowed to invest alongside his company in new well projects. He was allowed a 2.5% stake in these drilled wells. His argument for this was unlike many CEO’s he has skin in the game and a vested interest in his company doing well. Bear in mind, until recently he was both chairman of the board and CEO.
If that wasn't enough, it turns out that good 'ol Aubrey was also running a 'secret' 200 million dollar hedgefund on the side which traded in commodities. Although my initial reaction is to say this can't possibly be a good thing, I have read the reuters report about it and it doesn't seem like the end of the world. However, with corporate malfeasance in the forefront of people's minds I doubt this will go untouched.
What do you think of the current state of corporate governance and what can be done to avoid examples such as this? Although he built the company from the ground up, should Chairman and CEO be mutually exclusive roles within a company? Should Chesapeake shareholders be alarmed?