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The rights to obtain information needed by investors addressed in the article below have been a subject of attention by both the Forum and the reporter since the dot-com bubble, as indicated in the following article from Ms. Morgenson's "trenchant and incisive Wall Street coverage" of strikingly similar corporate reporting, compensation and risk control issues for which she won a Pulitzer Prize in 2002:


New York Times, March 29, 2009 column

The New York Times




March 29, 2009

Fair Game

Shareholders Who Act Like Owners

HERE’S a study in contrasts: 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.

We’ve been here, quite notably, once before, when shareholders sued directors at the Walt Disney Company, a case decided in 2005. That suit, which began as a books-and-records demand, related to the $130 million exit package that Michael Ovitz snared after just 14 months of work, and alleged that Disney’s directors breached their fiduciary duties to shareholders. The plaintiffs lost the suit, but directors were put on notice that they had to be able to justify their pay decisions.

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.

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.

“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.”

CHESAPEAKE’S shares have recovered a bit in 2009, up 13.4 percent. But last year, Chesapeake’s stock drop wiped out more than $14 billion of investor wealth. The losses rise to $33 billion if you calculate the value of the shares from their peak in July to the close at the end of the year.

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?

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.

The agreement also froze Mr. McClendon’s annual salary and cash bonus at $2.93 million for five years and allows for partial recovery of the one-time $75 million bonus if he leaves the company over the next five years. The board structured the bonus as a credit Mr. McClendon gets to use to buy drilling rights to wells that Chesapeake develops.

“There is a reasonable basis to believe that Chesapeake’s officers and directors may have breached their fiduciary duties to the company by approving the contract, and in particular, the $75 million bonus,” the Louisiana retirement system’s court filing stated. It said it also was “concerned about the possibility that the bonus was less a reward for outstanding service than an effort to bail Mr. McClendon out of his personal financial difficulties.”

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.

The company said none of the directors would comment for this article.

It’s not clear whether the Oklahoma state court will rule in favor of the investor’s books-and-records demand, filed last Thursday. Even if it does, documents may show that the Chesapeake directors exercised sound business judgment when it gave Mr. McClendon his $75 million bonus.

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?



A version of this article appeared in print on March 29, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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