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 CEO 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, analysts said.
Some of the directors being looked at closely include Oklahoma State University President Burns Hargis and former Oklahoma Gov. Frank Keating.
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.
"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. 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 Keating, a Chesapeake director since 2003, worked for Chesapeake in real estate and land acquisition roles. Chip Keating, a former member of the Oklahoma Highway Patrol, was paid $251,515 in 2009 for working in real estate development for Chesapeake, according to a company filing.
Chesapeake has given more than $10 million in funding to the OSU, where board member 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 Chesapeake director from 1993 to 2011, lent 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.
Although 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.
Chesapeake remains confident of the board's independence, said Michael Kehs, a company spokesman.
"Each of Chesapeake's directors has built a superb reputation based on impeccable credentials, independent judgment and unwavering integrity," he said.
Directors have voted to cut their own pay by 20 percent. But the company's new plan, announced Friday, rewards directors 34 percent more than the average $260,752 in compensation received last year by board members at 15 other energy companies on the Standard & Poor's 500 Index, calculations show.
Only three of the 16 companies - Apache Corp., Anadarko Petroleum Corp. and EOG Resources Inc. - paid more to their board members in 2011, according to data compiled by Bloomberg.
Chesapeake directors now will receive $100,000 in cash and $250,000 in stock, and will no longer be allowed 40 hours of personal jet travel at company expense. The reported cost of non-cash or stock compensation to directors, including the jet travel, was $1.09 million in 2011, according to a company filing.
McClendon owed $846 million as of Dec. 31 on loans he accumulated to fund the cost of drilling, a requirement of the so-called Founders' Well Participation Program. He took loans from firms that had business dealings with Chesapeake, including Wachovia Corp., prompting questions from shareholders and analysts over whether the deals constituted a conflict of interest.
The program has been halted by the board. Directors say they will strip McClendon of his chairmanship as soon as they find an outsider to replace him in the role.
Chesapeake's board, besides Miller, Keating, Hargis and McClendon, includes Louis A. Simpson, chairman of SQ Advisors LLC; Richard K. Davidson, former chairman of Union Pacific Corp.; Charles T. Maxwell, chairman of American DG Energy Inc.; Kathleen M. Eisbrenner, deputy chairman of Flex LNG Ltd.; and former U.S. Sen. Don Nickles, R-Okla.
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 company's stock has fallen 45 percent since the beginning of 2011.
On Monday, Institutional Shareholder Services and Egan-Jones Proxy Services, which advise investors on governance and proxy votes, urged shareholders to vote against Hargis and Davidson, the two outside directors up for re-election at the company's June 8 annual meeting.
