[Corp. Watch] Corruption in America: When CEOs lose money, their companies give it back

[Corporation Watch]

Chesapeake Energy Battles CEO Compensation Furor

  After founder Aubrey McClendon lost his fortune in 2008, the company's
  board raised his pay and bought his art -- and Wall Street is enraged

By Christopher Palmeri

(BusinessWeek, April 29) -- Oil and gas producer Chesapeake Energy is  
one of the 100 best U.S. companies to work for, according to Fortune  
magazine. If you are Chesapeake CEO Aubrey K. McClendon, that's  
certainly the case.

	On April 21, the Oklahoma City-based company disclosed what may turn  
out to be the largest CEO pay package of 2008. In a year when  
Chesapeake shareholders saw their stock fall nearly 60 percent and the  
company's profits drop by 50 percent, McClendon's pay soared five-fold  
to $100 million.

	And, as they say in late-night TV commercials, that's not all. The  
company also agreed to purchase McClendon's personal art collection --  
vintage maps that had been hanging in Chesapeake's corporate office --  
for $12.1 million.

	In addition, the company's proxy filing notes that Chesapeake paid  
$4.6 million to sponsor the Oklahoma City Thunder, an NBA team in  
which McClendon personally owns a 19 percent stake. The filing says  
the company received TV air time and other sponsorships in return.

	McClendon, 49, ran into financial trouble last October with the  
market's steep slide. He had borrowed money to buy Chesapeake's once  
high-flying stock, and had become the company's largest individual  
shareholder.

	With Chesapeake's shares tumbling along with commodity prices,  
McClendon received margin calls and was forced to sell nearly all of  
his shares over three days. A stake that was worth $1.9 billion just a  
few months earlier vanished almost overnight, and McClendon said in an  
Oct. 10 press release that he was "very disappointed" by having to sell.

	But in December, McClendon's board offered him a new pay package.  
According to public filings, the company designed his new plan to keep  
McClendon from leaving and to reward him for four large deals he  
negotiated last year.

	(Chesapeake sold interests in four of its fields to British  
Petroleum, StatoilHydro ASA, and Plains Exploration and Production in  
transactions that raised $10.3 billion.)

	Still, Chesapeake's largesse in these tough times turns off some on  
Wall Street, especially given the 58 percent plunge in company shares  
last year, to 16. (The stock is now just below 20.)

	"Will Chesapeake's Board please stand up?" Alliance Bernstein analyst  
Ben Dell titled an April 23 report on the company. "Following last  
year's disastrous performance for shareholders, Chesapeake awarded its  
CEO a generous pay package, unparalleled in the industry," Dell wrote.

A most "shameful document"

	Investor Jeffrey Bronchick, whose Los Angeles-based asset management  
firm Reed, Conner & Birdwell owns 1.18 million shares of Chesapeake,  
told Chesapeake directors in an April 23 letter that the company's  
proxy statement shocked him.

	"I sat in silence for ten minutes contemplating my 25-year career in  
the investment management business," Bronchick wrote. "I have never  
seen a more shameful document." Bronchick added that he plans to vote  
against all the directors up for election at the company's June 12  
annual meeting.

	Chesapeake declined to comment on the compensation controversy and  
said McClendon, and other officials were not available for comment. In  
response to an e-mail, McClendon said "Our [Securities and Exchange  
Commission filing] speaks for itself we believe."

	McClendon's pay has already dragged the company into court. In March  
the Louisiana Police Employee Retirement System, which owns 85,000  
Chesapeake shares, filed a lawsuit in state district court to acquire  
all company documents regarding McClendon's compensation.

	That filing -- an initial effort to gather information -- also says  
the Louisiana investors may file a shareholder lawsuit alleging that  
the board breached its fiduciary duty to shareholders by signing a  
lucrative new employment contract with McClendon when his old contract  
hadn't yet expired.

	The art purchases simply add fuel to the fire, says attorney Marc  
Gross, who represents the police pension fund. "There's no purpose  
served by an oil company buying art," Gross says. "It's not a museum."

	In an April 16 response to the police pension fund suit, the company  
asked the judge to deny the investor's request for documents. The  
court filing said that McClendon's employment agreement was "the  
product of a carefully crafted exercise of business judgment that  
could not possibly support any inference of probable wrongdoing."

Well-drilling investment option

	McClendon and former partner Tom L. Ward founded Chesapeake in 1989.  
Through canny acquisitions and a big bet that new reserves could be  
found under thick shale deposits, the pair turned Chesapeake into the  
nation's largest producer of natural gas.

	Ward has since left the company, but McClendon continues to be part  
of an unusual arrangement Chesapeake calls the Founder Well  
Participation Program. McClendon is allowed to invest his personal  
money for as much as a 2.5% interest in any wells the company drills.

	That program was a big part of McClendon's compensation package last  
year. Rather than have him pay out of his own pocket, Chesapeake paid  
$75 million to cover McClendon's share of the well investments.

	Chesapeake's three-member compensation committee includes former  
Oklahoma Governor Frank Keating, whose son and daughter-in-law also  
work for Chesapeake, each earning just under $140,000 a year.

	The company says in public filings that its compensation committee  
members qualify as independent directors, according to New York Stock  
Exchange guidelines. Keating was traveling outside of the country  
April 28 and could not be reached for comment.

	Corporate art collections are always a prickly topic for investors.  
Shareholder lawsuits prompted Occidental Petroleum to eventually wean  
itself from a Los Angeles art museum sponsored by former chairman  
Armand Hammer.

	Casino magnate Steve Wynn leases his personal collection to his  
company Wynn Resorts for $1 a year, although the company pays for  
insurance and security. As for Chesapeake, its public filing says that  
it got a deal. A private appraiser figures the collection is worth $8  
million more than what the company paid.