Reuters: YOUR PRACTICE: Protecting executives’ reputations
By Jennifer Hoyt Cummings
April 26 (Reuters) – When it comes to managing money for corporate executives, financial advisers have to protect more than just finances. They also have to watch out for a client’s reputation.
News that Chesapeake Energy Corp Chief Executive Officer Aubrey McClendon engaged in questionable transactions with his company provides a potent reminder of this responsibility.
McClendon took out as much as $1.1 billion in personal loans by using his stakes in the energy company’s oil and natural gas wells as collateral, Reuters reported last week.
The loans were made through three companies controlled by McClendon and that list Chesapeake’s headquarters as their address. These deals raised questions about his ability to act in the best interest of Chesapeake investors and led to a 5 percent decline in the company’s stock from when the first article appeared last week through Wednesday’s market close.
On Thursday, Chesapeake was poised to end the program that gave McClendon an ownership stake in its wells, saying its directors never reviewed or approved the executive’s mortgages on those properties.
That contradicted Chesapeake’s statement last week that its board was “fully aware” of McClendon’s financing transactions around the well ownership stakes. Now the U.S. Securities and Exchange Commission has started an informal inquiry.
For financial advisers, the lesson is clear. Take time to learn about a client’s pay package and corporate policies so you can spot red flags before they become a public relations nightmare. Then serve as the voice of reason if an executive wants to enter into a questionable deal.
SELL SHARES CAREFULLY
Advisers also need to make sure clients stay diversified by regularly selling shares of their company, but in a way that does not give the appearance of losing faith in it.
One strategy an adviser might use with an ordinary client would be to hold company stock, but hedge it against swings in the share price. But a company might ban that practice for executives, said Stuart Stein, a lawyer and co-head of the global corporate practice group for Hogan Lovells.
Consider having clients adopt a set schedule for selling stock that they can refer to if questions arise. For instance, make it a policy to exercise stock options as soon as they vest, said executive compensation consultant Steven Hall.
The client might end up selling the stock at inopportune times, but this strategy can help avoid accusations of insider trading.