COMMENTARY | Several corporate executives have been in the news recently for missteps ranging from trading losses, falsifying resumes, misappropriating corporate resources and offering personal stakes in the company as loan collateral. Despite suffering public humiliation and sometimes forced resignation, many of these executives will still hit payday jackpot totaling tens of millions of dollars.
For example, Ina Drew, former Chief Investment Officer at JP Morgan Chase, who resigned over the $2 billion trading loss scandal will still earn $15.5 million as part of her 2011 payout. Her boss, JPMorgan Chase CEO Jamie Dimon will earn $23 million. His compensation package was approved at Chase's shareholder meeting even after the trading loss was announced.
Perhaps the most egregious of the recent scandals on executive compensation is that of Aubrey McClendon, the CEO and founder of Chesapeake Energy, who is considered a shale natural gas pioneer. Mr. McClendon has one of the most generous perks in form of a "Founder Well Participation Program (FWPP)", which has since 1993 allowed him "a contractual right to participate and invest as a working interest owner (with up to a 2.5% working interest) in new wells drilled on the company's leasehold." In simpler words, Mr. McClendon has had the right to invest in every well that Chesapeake drills for his personal profit. According to Reuters, Mr. McClendon had borrowed up to $1.1 billion against these interests from the same lenders his company used. After an informal investigation by the SEC, Chesapeake announced the resignation of Mr. McClendon as the Chairman of the board (he remains CEO).
Chesapeake's Aubrey McClendon had also engaged in "leveraged" trading in the CHK shares. In 2008, Mr. McClendon's margin calls from his brokers forced him to sell in excess of 90 percent of his Chesapeake stake (over 30 million shares) and suffer a $2 billion loss. Chesapeake later forbid the practice but the CEO's selling partly contributed to an 88 percent fall in Chesapeake's stock in 2008.Yet Mr. McClendon received a total compensation package worth $112 million, including a one time cash bonus of $75 million "to help him meet requirements for paying the costs of his personal stakes in Chesapeake-owned wells". In essence, the public shareholders bailed out the CEO. To add insult to injury, Chesapeake also bought his personal map collection for over $12 million. Reuters also reported that during 2004-2008, Mr. McClendon ran a private $200 million commodities hedge fund with his income from Chesapeake when he was still leading his company, a fact that was not disclosed to the SEC.
When companies decide to go public (IPO), it becomes imperative that interests of all shareholders, not just company insiders are taken care of. I am wary of companies with dual share class structures, which give super voting powers to a small group of insiders. The board of directors should be responsible when negotiating pay packages for executives. Executive pay arrangements should include stricter claw back provisions when a CEO or another executive is terminated for cause, causes a significant loss, or violates the terms of employment. Compensation committees of the Board should not include a company executive. Finally, a CEO should not receive a 2011 bonus when he in fact joins a company in 2012, and already receives a generous signing bonus.
While there are no easy answers (for example linking pay to profits or stock price only can cause company leaders to focus on the short term), it is time to acknowledge executive compensation in particular and corporate governance in general needs reform and increased transparency. As in the case of Chesapeake, proxy forms (DEF 14A), Forms 4 and SG13G (beneficial ownership of securities) filed with the SEC did not clearly state the true value of Mr. McClendon's wealth attributable to the company, or his private dealings that were in fact related to the company.
Unfortunately, corporate governance reform cannot be applied with a broad brush. For example, while UBS' 2011 trading scandal had seen the ouster of both its chief risk officer and its CEO, I would be saddened if JPMorgan Chase's CEO Jaime Dimon had to take the fall. However, while Chesapeake's founder and CEO Aubrey McClendon is considered the visionary who developed shale-gas industry and contributed to U.S.'s energy independence, he should be held accountable. I believe Chesapeake board's 15 percent pay reduction and the ultimate termination of the FWPP in 2014 may be too little, too late to renew investor confidence.
Disclosure: No personal positions in above companies
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