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Who’s Minding The Store?

On his Conflict of Interest Blog, Jeff Kaplan had a terrific post this weekend about the CEO of Chesapeake Energy.

The company let boss Aubrey McClendon take personal stakes in the wells it drilled.

‘By itself,’ Kaplan said, ‘this arrangement — while unusual and controversial — does not, in my view, inherently involve a COI.  Indeed, one could argue that by investing side by side with the company, the CEO aligned his interests with those of the company’s shareholders.’

So what’s the problem?

To pay for stakes in new wells, McClendon borrowed more than a billion dollars — using his stakes in existing wells as collateral — from a group that Chesapeake was trying to sell assets to. Investors complained that the arrangement raised a conflict of interest. They worried that Chesapeake might have sold its assets to the firm because the firm agreed to lend McClendon money, and not because the terms of the deal were the best Chesapeake could have received. The arrangement was not previously disclosed to shareholders.

Kaplan asked: ‘Where was the board — which included a former governor of Oklahoma and former U.S. Senator — when this was going on?’

On Friday, Reuters reported that McClendon also borrowed money from a board member who was part of the governance and compensation committees — the groups setting McClendon’s pay and monitoring for conflicts.

“For an independent board member on the compensation and corporate governance committees to be doing a deal with the CEO, that’s something that would be inappropriate governance and that should be disclosed,” David Larcker of the Stanford University Graduate School of Business told Reuters.

Read more on the Conflict of Interest Blog.

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