Why is Chesapeake Cutting Back?

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Chesapeake Energy Corp. (NYSE:CHK) will look to cut superfluous spending and will not pay out a bonus to its CEO, Aubrey McClendon, amid investor criticism of heavy spending and lucrative compensations for investors and directors.

The Wall Street Journal reports that the nations second-largest natural gas producer will slash charitable and political spending in addition to nixing McClendon’s bonus, per his own request, while also limiting his use of the company aircraft. The company’s stock dropped 25 percent last year.

“Chesapeake, based in Oklahoma City, said Monday that board committees were reviewing both the company’s corporate governance and its compensation practices. Chesapeake has already made significant corporate changes; in June it replaced a majority of its board with directors proposed by its largest shareholders, Southeastern Asset Management Inc. and activist investor Carl Icahn. The company previously said it would cut board compensation by 20%,” reported the WSJ.

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CHEAT SHEET Analysis: A-Level Management Does Not Run The Company

One of the core components of our CHEAT SHEET Investing Framework focuses on a company’s management, and any time its chief executive has to forego a bonus due to surplus spending, this belief is rejected.

While it is important to note that Chesapeake is taking steps in the right direction — namely passing a measure that will allow large shareholders to nominate directors and cutting political and charitable spending — while McClendon is at the helm it would be prudent to stay away from their stock. This is a company to keep an eye on as investors have an opportunity to catch it at its trough, but stay away as long as its CEO has questionable spending habits.

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