This is a story of a poster-child for poor corporate governance, or drawn as a caricature of the reckless, megalomaniac, self-enriching CEO but it could also be the company you are invested in as you can not believe this is limited to just one but this one is the easiest to see and explain.
You may have seen the news reports of recent date that the CEO of Energy Giant Chesapeake Energy, the second largest oil driller in the US, was caught borrowing huge amounts of money from the company to a private company he started. Oh… they failed to mention that. it was not a personal loan. Want to get the big picture…. here we go…
First, He borrowed 1.1 billion dollars, that’s 1,100,000,000 from the company to his companies operating in the same industry as Chesapeake. He has or could have a high degree of risk for conflicts of interest. As in, whose interest will he look out for, his own or Chesapeake’s?
Some of you might think this is Ok if the shareholders were in agreement and were well informed of the loan and it purpose. While I would agree “if” the shareholder were informed and consented. I don’t think that’s how it happened.
As it turns out he borrowed against the value of his shares in the company for the collateral.
Whats the upside for him?
He has the knowledge of the future gas plays, mainly the Utica gas & oil play in eastern Ohio, and if you have the money to make it happen, the profits are all “his” but he has to pay little no nothing for the loan that he apparently could not get from a bank.
What is at stake for Chesapeake?
They have little to gain. in fact they lose the same in investments and if he fails, his company folds up in a bankruptcy and Chesapeake not only does not get their money back, share value will be lost. Knowledge from the company’s research used against it by the new company.
He previously had sold a set of maps to the company for the tune of 12 million dollars. Who knows what else he had sold the company for bogus stuff to pilfer even more money from the bottom line? Will some shareholder be able to comb through the books and be able to understand it?
Up till now, I had only been guessing at where all those corporate profits were going as it really did not seem that the shareholders were getting their fair share. Now the whole question of corporate profits is in question for a bunch of companies !
Do you know what the CEO’s are doing in the companies you are invested in ? It’s to easy to pilfer money out through hidden entries in the books.
It just seems like a new smoke and mirrors trick for a modern snake oil salesman. Banks, oil company’s, insurance company’s and their CEO’s are all in question in my book.
What? you will wait till it becomes the next Enron before you wake-up.
That’s OK for your money but not mine ! You need to ask questions, demand transparency in the book keeping and ask even more questions about what you don’t understand. Of course the banks might say that it is a complicated instrument that you would not understand and I say “TRY ME”.