A bad omen
I believe this chain of events reflects badly on both Ward and his board.
First, the fact that SandRidge was left with only $636,000 in cash at the end of 2008 helps highlight the problems with the perk that allowed Ward to take a stake of up to 3% in company wells. Compare that with the controversial perk Chesapeake Energy Corporation (NYSE:CHK) gave to its former chair and CEO Aubrey McClendon to take a stake of up to 2.5% in company wells.
At SandRidge, this perk helped Ward cherry-pick SandRidge’s best assets and facilitate business transactions that were against the best interests of shareholders, even during particularly troubling times for the company. And according to Reuters, he walked away with about $19 million in profit for doing so.
Second, the fact that SandRidge’s board allowed Ward to use company records to facilitate a personal financial transaction reflects poor oversight at best, and perhaps even a mentality that SandRidge is Ward’s company. I’m worried that this mentality has led to the board’s approval of a variety of other questionable dealings at SandRidge that put Ward’s private interests at odds with the company’s general business interests.
I don’t know about you, but I prefer to own companies run by boards that view the company as the property of all shareholders.
A lack of candor
In addition to the other factors, I’m concerned about SandRidge’s lack of candor regarding this lawsuit. As Warren Buffett argues, businesses owe their shareholders candor and should clarify “the pluses and minuses important in appraising business value … [and] tell you the business facts we would want to know if our positions were reversed.”
Given the shadiness of the business dealings that appear to have led to the $5 million settlement, it’s not surprising that SandRidge’s leadership would want to disclose as little as possible about it, and that they’d want disclosures to be scattered across a variety of documents to make it hard for shareholders to gain a clear picture of events. However, I believe the likely motivation behind this lack of candor is a bad sign for shareholders.
On the other hand, the addition of four new board members put up by activist shareholder TPG Axon and the recent elimination of the poison-pill provisions SandRidge adopted in November may offer some hope of a turnaround. If these activists succeed in making further governance improvements, the stock may be worth buying. But without continued, significant improvements, I believe cautious investors should continue to steer clear of the company.
The article One More Reason SandRidge’s Board Should Be Gutted originally appeared on Fool.com.
Fool contributor M. Joy Hayes, Ph.D., is the Principal at ethics consulting firm Courageous Ethics. She has no position in any of the stocks mentioned. Follow @JoyofEthics on Twitter. The Motley Fool has options on Chesapeake Energy.
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