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Reuters Exclusive: After McClendon's trades, Chesapeake board gave blessing


Chesapeake's board hasn't said whether it knew about Heritage or whether it vetted the hedge fund's trading for any conflicts. Ward said he couldn't recall whether the fund was disclosed. Even though the company still allows McClendon to trade in commodities, the 2009 agreement does signal that it was tightening its grip to some degree.

“In 2004, they had a contract that was not nearly as long, not nearly as precise,” said John Coffee, a contract law professor at Columbia University. “It looks like the board learned something over the years and was increasingly beginning to restrict his activities,” Coffee said of McClendon.


Reuters reviewed McClendon's employment contracts with Chesapeake, filed with securities regulators, since 1997. In that time, the contracts have been revised or amended about a dozen times, for a variety of reasons.

Some of the revisions relate to the controversial Founders Well Participation Program, which allowed McClendon to buy as much as a 2.5 percent share in all wells that Chesapeake drills. In the wake of the Reuters investigation into McClendon's personal borrowing, Chesapeake's board announced it would discontinue the program in 2014.

One example of the changes comes in a section of the contract called “outside activities.” Initially, that section imposed a blanket ban on McClendon serving as an officer, general partner or member of an outside enterprise. It did not differentiate between public or private firms.

In July 2001, that ban was relaxed. The new contract said he could become a “general partner or member of any corporation, partnership, company or firm,” so long as the activity was a “passive investment” that involved “minimal” time. It barred him from any role in a “public” company.

In July 2005, shortly after Heritage was established, the contract was again revised. The new contract said he could not “engage in activities which require such substantial services” that McClendon would be “unable to perform the duties assigned to the Executive in accordance with this Agreement.” It also said he could not “serve as an officer or director of any publicly held entity” but made no other mention of external management roles.

That text remains in place in the last contract, which took effect March 1, 2009. The new text addressing commodity trading and hedge funds also has been in place since then.

McClendon's contract gives him more latitude for outside ventures than his subordinates are allowed.

Chesapeake's contracts with at least four other senior executives say the executives may not “engage in other business activities independent of” Chesapeake. They specifically ban the executives from serving “as a general partner, officer, executive, director or member of any corporation, partnership, company or firm.”


During 2008, a year in which McClendon still operated the Heritage hedge fund, Chesapeake's board awarded him the biggest pay package of any Fortune 500 CEO. It was worth around $112 million. A group of shareholders later sued, calling the pay package too generous.

The company also gave McClendon a $75 million cash bonus that year — the same year that margin calls from his brokers forced McClendon to unload more than 90 percent of his Chesapeake shares. He suffered a $2 billion paper loss, and his selling contributed to an 88 percent fall in Chesapeake's share price from its all-time high of $74 that year.

In its disclosure statement of January 7, 2009, Chesapeake explained why it chose to compensate McClendon as it did: “Because of other entrepreneurial opportunities that exist in the industry and Mr. McClendon's reduced Company stock holdings, the Compensation Committee focused on providing a retention incentive to Mr. McClendon that the Compensation Committee believed would be effective for multiple years without issuing substantial equity awards at current stock prices, which the Compensation Committee views as depressed.”

The company didn't elaborate on that statement.

(Additional reporting by Sarah N. Lynch in Washington and Jonathan Leff in New York; editing by Blake Morrison)


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