SandRidge Energy (NYSE: SD ) Chairman and CEO Tom Ward has been using the company as his personal playground for too long. And his board has been letting him.
Here's a recent example.
Tom Ward's $5 million wrist-slap
According to SandRidge's 2013 proxy, Tom Ward has to pay the company $5 million over the next four years to settle a third-party lawsuit. Beyond that, the proxy says very little, leaving shareholders guessing about the nature of the lawsuit and why Ward has to pay $5 million to a company he runs. Whether this payout is a consequence of misconduct should concern shareholders.
A troubling tale
Based on a compelling account from Reuters of what probably happened, I believe shareholders should be very concerned. Here's the story it tells.
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 (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.