How Has Chesapeake’s Aubrey McClendon Survived?

Why hasn’t Chesapeake Energy (NYSE:CHK) fired its controversial CEO Aubrey K. McClendon? Maybe it’s because the board of directors failed miserably in its fiduciary duties to shareholders.

But perhaps now that Chesapeake’s activist investors, Mason Hawkins of Southeastern Asset Management and billionaire Carl Icahn, have wrestled the company into revamping the board, McClendon’s days could be numbered. Chesapeake agreed to replace four of the nine members of the existing board and appoint an independent chairman. (McClendon had also held the chairman title until early May. He’ll remain on the board.)

McClendon’s days should be numbered, but before the recent controversy, management clearly thought that Chesapeake Energy was lucky to have a CEO of his genius. The language in the company’s 2011 proxy is so complimentary that it wouldn’t surprise me to learn that McClendon wrote it himself. It’s tough to swallow:

“Under Mr. McClendon’s leadership, the Company has delivered strong operational results and performance despite continued market challenges impacting the natural gas and oil industry. We believe that Mr. McClendon’s continued leadership, and the consistent effort of our senior management team, have positioned the Company very favorably to carry on its pioneering approach to generating superior performance for the next decade and beyond.”

The board members weren’t the only ones to extol the virtues of McClendon, whose 2011 total compensation was more than $21 million. Last year, Forbes wrote that McClendon was a “true genius when it comes to financial engineering — finding a constant stream of other people’s money to replenish Chesapeake’s coffers so he can keep acquiring acreage and drilling wells.”

As Reuters recently discovered, there was less to McClendon than met the eye. The board allowed him to take out more than $1 billion in loans that were collateralized with his interest in thousands of Chesapeake wells. To make matters worse, EIG Global Energy Partners, McClendon’s lender, is also a big source of funding for Chesapeake, blurring the lines between the personal interest of the CEO and those of the company he’s supposedly leading. This should never have happened.

Indeed, given McClendon’s extensive personal investments, it’s hard to see how he was able to devote sufficient time to being CEO, the job shareholders expected him to do. The board needs to immediately investigate whether McClendon did personal business on company time. If there’s evidence that he did that, he should be fired — immediately.

So, figuring out what to do about the CEO should be the new board’s first agenda item. The fact that the previous board had allowed him to act in his own interest instead of shareholders created an awful precedent.

McClendon is in trouble that seems to deepen by the day. Reuters, whose coverage of the story has been outstanding, is reporting that the CEO has hired Marvin Pickholz, a veteran securities lawyer, to represent him in the SEC investigation into the loans. I am sure McClendon will be hiring many more lawyers. The company should try to force McClendon to return some of the bonuses he was awarded. His stock awards between 2008 and 2010 topped $63 million.

According to the proxy, his employment agreement expires on December 13, 2013. But getting rid of McClendon may prove to be expensive. According to the proxy, Chesapeake would have to pay him more than $63 million if he’s terminated without cause. That, of course, doesn’t include the legal fees Chesapeake may incur because of McClendon.

Chesapeake already is trying to undue the damage he has done. Blooomberg reported that the company, which is facing $22 billion cash-flow shortfall after natural gas prices plunged, is in talks to sell pipelines to Global Infrastructure Partners for $4 billion. That’s just the latest asset sale from Chesapeake, which has seen its share price fall more than 18% this year, even after sharply rallying to its current $18.20 since the board shakeup was announced on Monday.

And when McClendon does leave Chesapeake, he won’t need to be in a rush to find a new job. Forbes estimates his fortune at more than $1 billion.

Jonathan Berr does not own shares of the listed companies. Follow him on Twitter @jdberr.

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