by Merlin Hernandez

Earlier this year, it was revealed that the Chesapeake Energy CEO and founder profited enormously from personal investments in company wells through bonuses that were part of his board-approved compensation package. The bonuses may not be quite illegal. However, they bare a fundamental weakness in governing regulations and may yet face mandated clawbacks. But the issue does reflect a corporate governance culture that was not broad enough to be congruent with emerging values in the society. Taking wider stakeholder value into consideration in the face of high unemployment, displaced military veterans, mortgage foreclosures, and the mangled American dream, corporate America has come under more scrutiny than ever. Even with record profits, executive compensation is still expected to bear some relationship to wages across the board in order to be seen as morally appropriate.

And then there is that slippery slope from practices that may be viewed as unethical to those that may be downright illegal. A few months later the Chesapeake CEO was stripped of his chairmanship by a board more responsive to the tide of ethical expectations amidst revelations of personal loans to the CEO from a firm that also finances the company. This was a direct contravention of Sarbanes-Oxley restrictions and a major conflict of interest. All of this while there are reports that capital spending has exceeded cash in operations in every quarter since 2003 – not necessarily a sign of impropriety but a red flag in terms of efficient stewardship nonetheless. The Chesapeake head was also accused of collusion and bid-rigging in suppressing land prices in Michigan in violation of anti-trust laws. The IRS, DOJ, and SEC launched investigations.

A brief study of Chesapeake’s core values explains a lot. There is an almost missionary emphasis on a commitment to “environmental excellence.” Business philosophy, operational values, commitment of resources, and regulatory compliance are focused on environmental protection in a myopic view of the company’s social responsibility. To this extent, Chesapeake appears to validate its values by its actions. But the overarching constructs that would comprise organizational ethics and fiscal responsibility have not been given prominence within those values. This is especially important for a publicly traded company as it leaves clear gaps for questionable, unethical, and perhaps illegal behavior by members of the corporation.

Inadequate governance policies remain a fundamental flaw in risk management. It can expose a business to legal liability, cause damage to the corporate image, and result in loss of public confidence in the stock. Contemporary business is slowly coming to the realization that sound ethics and a keen sense of social responsibility are more than elements of good corporate citizenship. It is indeed good business.

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