EthicsBite™

When the Chesapeake story first hit the news I asked why their CEO, who was reportedly lining up over $ 1 BILLION-with-a-B in personal loans, could need so much money? This week a detailed special report from Reuters tracked not only what CEO McClendon has been doing with all that money but how intertwined his personal business and aspirations are with the company’s business. To finance his own personal spending and investments, including a house in Bermuda and investments in company wells, McClendon borrowed heavily and mortgaged everything so that he could own more. Hence the constant need for more personal cash.

He ran the company the same way (noted in one of my prior posts), borrowing against existing drilling sites to finance the acquisition of more leases and properties that could be drilled. In essence the company was always using more cash per year than it was producing from ongoing operations. In spite of that, CEO McClendon made decisions and received personal benefits that required significant amounts of corporate cash according to the Reuters report.

He also, as do many CEOs, had access to corporate jets. But McClendon and his family used these jets extensively, thereby receiving a significant amount of additional executive compensation totally at his own discretion.

McClendon also decided to invest Chesapeake profits in revitalization projects for Oklahoma City, including a shopping center across the street from the company’s campus. Two restaurants in that center just happened to be part owned by McClendon. According to Reuters, the shopping center, Classen Curve, did not even appear as a footnote in the company’s financial statements.

As CEO he decided that Chesapeake should invest in the Oklahoma City pro basketball team, the same team that he personally owned part of. He then used his personal ownership interest in the team as collateral for loans that provided cash to maintain his personal quest for more. By deciding as CEO that the company should have its name on the team’s stadium and purchase a large block of tickets every year, he essentially paid himself, an owner of the team, with company funds.

In short, Aubrey McClendon appears to have had a big ego and desire to be a city father, and he used the company’s funds to support that ambition. He has been unable to distinguish between himself and the company, thereby placing his co-owners, the shareholders, at a much greater level of risk than most of them probably assumed they were exposed to.