Chesapeake Energy Corp. (CHK) cut the pay of its directors by 20 percent and halted their personal use of corporate airplanes amid mounting criticism of the company’s management.
The natural-gas producer has dropped 36 percent this year as it copes with a cash shortfall and questions about whether Chief Executive Officer Aubrey McClendon’s personal financial transactions conflict with his duties. Investors have accused Oklahoma City-based Chesapeake’s board of lax oversight of McClendon’s spending and potential conflicts of interest.
“Our concerns are not merely with the directors’ excessive pay and perks, but with the directors themselves and their repeated, costly failures to exercise independent oversight,” said Michael Garland, executive director of corporate governance for New York City’s comptroller’s office, which oversees 1.9 million Chesapeake shares held by the city’s pension funds.
The eight outside members of Chesapeake’s board will reduce their annual compensation package to $350,000, made up of $100,000 in cash and the rest in stock, Chesapeake said in a statement yesterday. The level is “at or below the average director compensation of the company’s peers,” the board said in the statement.
“We believe these latest changes to the directors’ compensation will address concerns raised by shareholders and better align Chesapeake with its peers,” Merrill A. (“Pete”) Miller, Jr., Chesapeake’s lead independent director and CEO of National Oilwell Varco Inc. (NOV), said in the statement.
Free Plane Travel
Chesapeake’s non-executive directors made an average of $533,163 in 2011, nearly twice the compensation for Exxon Mobil Corp. (XOM)’s board members, according to Bloomberg calculations. Exxon is the world’s biggest energy company with a market value about 40 times larger than Chesapeake.
Chesapeake last year spent $1.09 million on perks for directors, including allowing board members to use company planes for personal travel. Each non-executive board member could fly up to 40 hours on the jets per year, according to a filing with the U.S. Securities and Exchange Commission.
“Some will view this as too little, too late,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware in Newark. “Are they going to give the money back? Are they going to give the free rides back? It’s been going on for years.”
Chesapeake was one of only a handful of companies that allowed its board members to use company aircraft, Elson said in a phone interview yesterday. The practice reinforced the idea that the board wasn’t independent enough to stand up to Chesapeake’s management, he said.
In a May 17 letter, New York City comptroller John Liu called on shareholders to vote against two directors who are up for re-election at the company’s June 8 annual meeting, both of whom serve on the audit committee.
The company’s financial troubles “demonstrate the audit committee’s costly failure to act in the best interests of shareowners,” Liu wrote in the letter.
Chesapeake, the second-largest U.S. gas producer, said on May 1 that it may run out of cash to fund its drilling operations next year. The shortfall, estimated at $10 billion this year by Fitch Ratings, is pulling Chesapeake deeper into debt and forcing a selloff of as much as $20 billion in assets through next year.
$4 Billion Loan
Chesapeake got a $4 billion short-term loan from Goldman Sachs Group Inc. (GS) and Jefferies Group Inc. (JEF) within the past week that McClendon called a “bridge” as the company waits for asset sales to raise funds.
Chesapeake plans to repay the new loan by the end of the year with proceeds from the sale of oilfields in Texas’ Permian Basin and a joint-venture to develop the Mississippi Lime formation that straddles the Oklahoma-Kansas border. The company postponed a sale of future production from Texas oilfields and the spinoff of its drilling subsidiary.
Southeastern Asset Management Inc., Chesapeake’s biggest shareholder, said in a May 7 letter the company should consider selling itself and urged McClendon to spend less time meeting with analysts. McClendon’s management team should “put their heads down” and avoid “unproductive communications” including conferences and media interviews, Southeastern CEO O. Mason Hawkins wrote. Southeastern owns 14 percent of Chesapeake stock.
Holding Directors Accountable
The California Public Employees Retirement System, the biggest U.S. municipal pension, has called for other board reforms, including annual election of directors.
“Shareowners do not have the ability to hold directors accountable” since only a few of them are elected each year, the pension fund said in a May 14 letter to shareholders. The fund owns 1.8 million Chesapeake shares.
Chesapeake’s shares have dropped as gas prices reached 10- year lows in New York and after the company said it was reviewing McClendon’s personal financial transactions. McClendon, who is being stripped of his chairman’s role, used his personal stakes in company wells as collateral for personal loans from companies that were also doing business with Chesapeake.
Replacing the Chairman
The board, which is still seeking a replacement chairman, cut directors’ pay after consulting with an independent adviser as part of a broader review of compensation plans, according to the company’s statement yesterday.
Chesapeake cut McClendon’s pay 15 percent last year to $17.86 million in response to shareholders’ concerns that he was paid too much. The reduced pay package included $13.6 million in stock awards, a $1.95 million bonus and $975,000 in salary, the Oklahoma City-based company said in an April 20 filing.
The cut to board pay was announced after the close of regular trading on U.S. markets. Chesapeake fell 0.1 percent to $14.36 at 6:14 p.m. yesterday in New York after earlier gaining 6 percent.
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