Friday, April 3, 2009

Chesapeake Energy (CHK) CEO Aubrey McClendon With New Shady Compensation Deal; I was Right in My Prediction

This is so discouraging, even the CEO's who people have relatively high opinions of seem to simply be fleecing their companies - McClendon was supposed to be one of the "good guys". I found this article quite randomly when doing some weekend reading on a completely different topic but the title "Shareholders Who Act Like Owners" caught my eye due to the dysfunctional Board of Directors system in the U.S. It's yet another eye opening piece, on what boards and CEOs are doing - now in brazenly open nature - to make sure "heads we win, tails we still win" persists even in the toughest of times. I like to call them Boards of Cronies but I try to run a respectable outfit around here. When last we saw Aubrey M. he was losing almost his entire stake in Chesapeake Energy (CHK) [Oct 11, 2008: Chesapeake Energy CEO Forced to Sell Nearly All Shares to Meet Margin Call]

Wow. Aubrey McClendon, CEO of Chesapeake Energy (CHK) is infamous for his constant buying of his own company stock.

Aubrey K.
McClendon, the billionaire chief executive of Chesapeake Energy Corp., has sold "substantially all" of his stock in the company over the past three days in order to meet margin loan calls, the company said Friday. Between Wednesday and Friday, he sold 31.5 million of those shares -- 94% of his holdings -- for $569 million

Last month, Forbes showed McClendon at No. 134 on its list of the nation's 400 richest people, with a net worth of $3 billion, an increase from $2.1 billion the previous year.

Isn't this quote below rich? It will become more so after you read the New York Times article...

McClendon said he looked forward to rebuilding his ownership position in the company.

Want to know what I wrote in my "opinion" portion of the entry back in October? Dear reader you think I'm a cynic... a glass half empty person. Well if you stick around the market for years, and see these same things happening over and over - just new faces, and new companies - but the same game.... you too will become a cynic over time. Here was my prediction:

That's ok! First many of these shares were surely grants handed to him on a yearly basis by the executive compensation committee. Further, in our "heads we win, tails we still win" culture of payoffs (err I mean salary negotiations) the "company" will "independently" decide that if we want to keep the CEO working hard, we cannot just pay him a salary and his normal option grants - we need to load him with a boatload of new stock and options. Heck, with these low prices we can price the options at a price that poor Aubrey can make all the money he lost (and more) in 5 years. Because that's how it works. Because unlike normal workers in the rank and file - we cannot risk the CEO "not being incentivized" because their work ethic apparently disappears if the carrot is not immense. I am not going to watch this day in and day out but just you wait - there will be a massive option grant in the next 24 months because the board of directors of American companies are just the lapdog of the CEOs.

I was right. Damn right. And I wasn't even looking for this or following what CHK is doing since natural gas is so off my radar - just happenstance I found about this "gift".

And this is why for all this talk of new regulations on the financial industry, in 5 years almost everything will be back to "normal" - regulations put in now will be slowly chipped away year by year by the lobbyists... as markets rise people will forget as their Etrade accounts rise by a lovely $6700... the corporate chiefs will once again say we need unfettered markets and we're losing business to other countries by the heavy hand of oversight. Snip snip... away will go this regulation or that.... we learned our lessons they will say. Never again will we make those mistakes. Snip snip. That's just how Cramerica works: for the corporation, by the corporation. Funded by you.

Via the New York Times
  • While Congress whips up outrage over compensation at the American International Group, a shareholder at Chesapeake Energy, whose directors awarded a $75 million bonus to its chief executive even as the company’s stock plummeted, is doing what responsible owners should do: quietly and methodically demanding answers and accountability from directors who awarded the handsome payout.
  • There are good reasons that outsize bonuses are under heightened scrutiny these days. Shareholders have swallowed painful losses even as executives at many companies continue to enjoy big paydays.
  • And according to the Louisiana Municipal Police Employee Retirement System, which holds 85,000 shares of Chesapeake, the payout awarded late last year to Aubrey K. McClendon, the company’s chief executive, certainly seems ripe for inquiry.
  • Rather than filing an expensive and possibly futile suit against Chesapeake’s directors, the Louisiana shareholders have initiated a “books and records demand” in a state court in Oklahoma, where Chesapeake is incorporated. If the court allows the proceeding, shareholders can examine corporate documents to see if the board’s approval of Mr. McClendon’s bonus was proper.
Here is the incredibly shady part - Aubrey HAD a 5 year agreement that began in 2007. But now that he put himself on margin and lost his stash guess what was created at the very end of 2008. A NEW 5 year agreement!
  • Chesapeake, an oil and gas producer in Oklahoma City, awarded the $75 million to Mr. McClendon as a result of a new, five-year employment agreement struck on New Year’s Eve by directors and the executive. Mr. McClendon’s new agreement replaced a relatively new, five-year contract struck in 2007 that, obviously, had yet to run its course.
  • The new deal came at the end of a brutal year for Mr. McClendon. Last October, after Chesapeake’s shares dropped because of falling natural gas prices, a margin call forced him to sell 94 percent of his shares in the company. At its peak, his Chesapeake stake was worth about $2 billion.
  • Mr. McClendon’s margin woes led to some chatter that he might have to resign from the company. That’s because his employment agreement required him to hold Chesapeake stock worth five times his annual salary and bonus, a position he no longer had after the stock sales. (hah! resign?? no no no, if a CEO is lacking for shares just ask the board of directors to pony up some new ones!)
  • Happily for Mr. McClendon, the new employment agreement approved by directors temporarily lowered that requirement to just 200 percent of his salary and bonus. And the board also awarded him the $75 million bonus. (yes, we are all winners here... now Aubrey gets back on the horse back towards his old net worth - and the CEO is now incentivized to "work hard" for the shareholder. Because you dear sir, working in your Dilbert cubicle must be incentivized by some magic force - such as putting a roof over your head, or feeding your family. Or heck - pride in your work?? That's now how it works in CEO land - only with massive payouts can these very unmotivated people stay motivated. If they don't get enough dinero - well they lose interest apparently and really can't work so hard. Hence the logic of constantly lavishing them with new rewards - its incentives baby)
  • Given that Chesapeake’s earnings dropped by half,” said Marc I. Gross, a senior partner of Pomerantz, Haudek, Block, Grossman & Gross, which represents the Louisiana retirement system, “the $75 million bonus appears not attributable to Mr. McClendon’s exemplary performance but rather to the extraordinary losses he sustained when his Chesapeake shares declined by 60 percent. As such, the bonus appears to be a C.E.O. bailout, while ordinary shareholders got stuck with their losses.” (welcome to the Matrix)
  • Chesapeake said that it renegotiated Mr. McClendon’s employment agreement “in recognition of his leadership role in completing a series of transactions in 2008 that were valuable to the company and its shareholders.”
  • Sure, he orchestrated four big sales that generated $10.3 billion. And Chesapeake said they should result in “superior financial performance” over the next several years. But isn’t that what good managers strive for, bonus or not? And what if the sales don’t result in superior performance? What happens then? (I am sure there are clawback provisions! hah - kidding. See in a rationale compensation system you'd hold the bonus back until it was proven that performance today created shareholder value in X years. But we live in the brainwash corporate chieftan as celebrity culture. These special people can only work hard if given massive outlays - unlike the peasant class who work in the cubes. Hence give them the bonuses the year of the transaction - not the year when we see what value the transaction brought after watching it for a few years. It worked wonders in financials)
  • Chesapeake also said the bonus was designed to keep Mr. McClendon from abandoning the company he co-founded. “Because of other entrepreneurial opportunities that exist in the industry and Mr. McClendon’s reduced company stock holdings,” a statement from the company said, the board saw the award as a cheaper way to retain him than giving him stock awards at depressed prices. (ah yes, another of my favorite excuses - so few people in the world could actually run a natural gas company - I am sure no other person in Chesapeake itself could do it. Nope, without McClendon it's over. When he walks out they might as well shut the doors - its celebrity CEO time! These were the same excuses for bonuses in airlines, in autos, in financials - this tired excuse is well... tiring!)
  • So who are the Chesapeake directors? In addition to Mr. McClendon, they are Don Nickels, former United States senator from Oklahoma; Richard K. Davidson, former chairman of the Union Pacific Corporation; Breene M. Kerr, an M.I.T. trustee; Charles T. Maxwell, an oil industry analyst; Frank Keating, former governor of Oklahoma; Merrill A. Miller Jr., chief executive of National Oilwell Varco, an oilfield services company; and Frederick B. Whittemore, an advisory director of Morgan Stanley. (first, one of my favorite beefs with the American Board of Director system is putting the head fox as watcher of the hen house i.e. CEO as Chairman of Board - no conflict there. Then it's wonderful to see the normal array of ex politicians who you've shuffled money to over the years, along with industry cohorts. Anyone want to do some research on how much money Chesapeake shoveled down to Don Nickels over the years? Frank Keating? I am sure it was "material" - scratch my back, I'll scratch yours)
  • Whatever the outcome, kudos to the Louisiana retirement system for being a responsible shareholder and questioning what looks to it like yet another executive freebie. Investors own these companies, after all. Isn’t it a shame so few of them behave that way?
And you know the final excuse of these companies - if you are unhappy with what we do just sell your shares! Because your 450 shares are going to make all the world of difference to our decision making. We can run our company as a direct cash flow machine for the elite few at the top, and if you are unhappy take your $8000 and go home! Kudos to one institutional shareholder for taking a stand.

I'd normally be disgusted with this sort of story, but since I called that it would happen (they didn't even bother to wait more than a quarter to "refund" the CEO), what can I be disgusted about? It is par for the course and just another sign of a broken system of heads we win, tails we still win thievery that just keeps reverse Robin Hooding us to infamy. With that said, I can now remove Aubrey from my "somewhat admired" CEO list (my gosh - he founded a company and created shareholder wealth!) and toss him into the bin with the others. I'm sure he'll weep at night into his pillow of $100 bills.

So let's review
  1. CEOs need to be paid mega bucks at 350x the median worker because they are not incentivized by normal things that the peasant class is... such as pride, putting food on table, roof over head. Or just trying to do an effective job.
  2. CEOs of the 1970s and before were very lazy (many paid lowly wages of only 70x the median worker) - they were paid a fraction what today's era are, in relation to the median wage. Hence without incentives they performed poorly, did not work hard, nor were they very smart. I'm not sure what smart people did back then, but since "salary = brainpower and performance" (source: dogma) - I assume there were no smart people in those eras.
  3. CEOs of public companies in other countries are also lazy and perform poorly as they are paid a fraction of US public company CEOs, which clearly shows they don't know how to brainwash the masses... err, they don't have the skillz of US CEOs.
  4. CEOs of private companies who are paid far less than public companies in the general sense, are also lazy, unmotivated, and perform poorly. Otherwise they would be CEOs of public corporations. Because "pay = performance" - just ask Bob Nardelli ($200M just for leaving Home Depot) or Stanley O'Neil ($160M just for leaving Merrill Lynch)
  5. If you don't pay public corporation CEOs megabucks they will leave to go be CEOs ... umm, someplace else. Even though there are only so many public corp CEO spots in the U.S.. And if a whole host of CEOs left in protest of unfair working conditions, there would be a glut of CEOs on the market which in any other marketplace creates downward pressure on price (salary) but in this parallel universe it would make their demand (and salary) go up. Yep. And no, people with the same skill set as departed CEOs would not be more than happy to take those jobs for half the pay. Because that would make them pre 1980s type of CEOs. Or worse - European CEOs.
  6. CEOs must be paid on the value of transaction today, it doesn't matter if it works out in the long run to create value. CEOs are paid for "doing stuff" - the more flamboyant the better - see AOL Time Warner for example. If it does work out, we all win. If it doesn't work out, we all win. As long as we = CEO.
  7. If in the most unlikely event all hell breaks loose and CEO's have tons of underwater options or heck even margin calls since their excellent management has caused the stock to tank, see point 1 - we need to loot the company treasury to give them back their incentives. Or else they won't work hard. Even though their hard work thus far has caused the stock price to sink, and hence their options to become worthless. (see how circular it is?)
  8. Board of Directors are many times CEOs from other companies or politicans whose campaigns were largely funded by corporations whose boards they sit on. Unbiased folk if you will.
  9. If you are unhappy take your 450 shares and go somewhere else. This is our ballgame and you are blessed to be part of it.
  10. Anyone who argues with this system hates the rich and engages in class warfare. Or is classified as a very angry blogger. So never argue.
  11. If you truly were talented you would not be reading this, and indeed be a public corporation CEO. Instead you waste time reading blogs. Clearly you are not motivated properly. Carry on with your peasant lifestyle - you deserve it. That is all.
[Jan 22, 2009: Merrill Lynch's John Thain Can Only Work on $87,000 Area Rugs]
[Oct 4, 2008: Credit Crisis Sharpens Anger Over CEO Pay]
[Sep 27, 2008: Heads We Win, Tails We Win]
[Sep 17, 2008: Thain's Aides May Get $200M for Weeks of Work]
[Oct 30, 2007: You're Fired! Now Here is $160M to Help Ease the Pain]

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