If you're going to invest in a company, you need to know what the leaders of that company are all about. Do they have integrity, or have they been investigated for being unscrupulous in the past? These are important questions, because as a shareholder, you're essentially trusting the people with your money. You expect them to be stewards of the company and lead it (and in turn, you) to riches.
I want you to think back to last year: there was a CEO named Aubrey McClendon who headed up Chesapeake Energy. It came to light that Aubrey McClendon had taken out millions in personal loans and had odd hedge fund dealings. It turned out he was trying to make some extra money on the side by investing in oil and gas — like what he was supposed to be doing as the CEO!
What Happened at Chesapeake?
In 2012, it came to light that the company's CEO had received loans that were backed by his interest in the natural gas wells the company also owns. How did he get this interest in the wells? It was part of a compensation scheme he worked out with the directors of the company.
Then, it came to light last week that this same CEO may have been running a $200 million hedge fund that traded in oil and natural gas — the same business as the company! Talk about a conflict of interest.
As a result of all of this, the stock of the company dropped over 30% from before the news broke, and its debt has been downgraded to junk status by several rating companies. Aubrey McClendon is now also under investigation for various types of fraud, and the company is being investigated for its compensation practices.
How Could a Shareholder Do Research?
You may think that, as a shareholder, there isn't much that you could have done, but that is not true. There are more and more resources becoming available for shareholders to investigate and understand the inner workings of the companies in which they own.
For example, the world's largest corporate registration database provides comprehensive information about the companies' executives and directors. This information can be helpful because you can cross-reference it against other public data to get a full picture of any potential conflicts of interest a director or executive may have.
I've also mentioned the importance of researching company annual reports several times. The reason? In this case, any shareholder would have known about the well compensation program, and it may have raised some red flags about the compensation practice of the company. And, even if you didn't see a problem with the program then, you would have been aware of the implications very early on based on your research. You may have been able to get out of the company for a much smaller loss than 30%.
The Bottom Line
The bottom line is that it is more important than ever to research your company's or your investment's leaders and directors. You want to be certain, as an investor, that you know what you are getting into. The trouble with being a shareholder and not employed by the company is that you can never know all the interactions the company has since you must rely on annual reports and other filings. However, there are more ways than ever to investigate a company's board and the company directors list.
Readers, what are your thoughts on company due diligence in general?