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Wednesday, 23 July 2014

Sin Cities

Oil barons and tech hipsters share a dark side

Oil barons and technology hipsters seem very different. But they share a dark side. The chief executive of U.S. explorer SandRidge Energy and some of his peers jet around at shareholders’ expense, while at Facebook and Google founder-bosses are insulated from owners by super-voting rights. Clubby boards also feature in both sectors.

The U.S. oil and gas industry plumbs the depths of weak corporate governance and social responsibility, with 15 companies getting the worst F grade from consultancy GMI Ratings - far more than would be suggested by their weighting in the sample. Headline-grabbing offenders include Chesapeake Energy and SandRidge, whose founder Tom Ward kitted out the business with four corporate jets despite the fact that its wells are mostly within driving distance. Meanwhile James “Jim Bob” Moffett, chairman of Freeport-McMoRan Copper & Gold, recently engineered the purchase of McMoRan Exploration, which he runs and partly owns, for a whopping premium. Gold-plated CEO pay and perks also feature, along with generous remuneration for incurious directors.

Silicon Valley’s governance shortcomings aren’t so brash. Only a few tech companies are branded with GMI’s failing grade. Still by the consultancy’s count 41 of their number, including such leading lights as Facebook, Google and LinkedIn, have opted for multiple share classes that help bosses outvote other investors - a higher incidence than the average in GMI’s sample. Facebook’s Mark Zuckerberg holds just a fifth of the company’s stock but thanks to supervoting shares and other arrangements he commands over half of all shareholder votes.

Although it manifests itself in different ways, the two sectors thus share a certain disregard for regular owners. One reason could be that both abound with forceful entrepreneurs who started in complete control of startups and then sometimes struggled to adjust to the responsibilities of running public companies. That may help explain why Aubrey McClendon, the co-founder and CEO of Chesapeake, sold his personal map collection to the firm for an inflated $12 million before being forced to buy it back.

A tendency for boards to overlap and feature friends of executives may also owe something to the geographical clustering of the two industries. Oil and gas exploration companies tend to be centered in Texas and neighboring Oklahoma and Louisiana, while many tech firms call San Francisco and Silicon Valley home. When Freeport agreed to buy McMoRan, it also inked the purchase of a third company, Plains Exploration. As well as Freeport CEO Moffett’s dual role, other directors on the McMoRan board included the Plains boss. Cozy relationships are common in Silicon Valley too. Marc Andreessen, whose venture capital firm routinely sells smaller companies to tech giants, sits on the boards of Facebook, eBay and Hewlett-Packard.

For both energy and tech entrepreneurs, a peer group that includes still-private companies may also set a less than ideal example. Their bosses may not have the benefit of public shareholders’ money, but their chiefs can legitimately do as they please.

In the oil and gas patch, activist shareholders are starting to rattle the comfortable cages of some CEOs. Egged on by investor Carl Icahn, shareholders at Chesapeake ousted McClendon’s friendly board and replaced a system that allowed directors to be re-elected on a single vote with a majority requirement. And hedge fund TPG-Axon Capital has publicly challenged governance at SandRidge.

Entrenched managers and boards make these tough fights. But if enough votes can be mobilized, shareholders have the power to force change. Very few energy company executives hold supervoting shares that can prevent it.

Tech investors may not yet feel as abused as some in the energy sector. People like Zuckerberg at Facebook and Google founders Larry Page and Sergey Brin have achieved great things. But they won’t always get it right. If something does go awry, shareholders will often find there’s nothing they can do about it. Tech trouble, when it comes, could prove harder to clean up than the energy business.

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More oil and gas companies scored poorly on measures of corporate governance and social responsibility than any other sector, according to GMI Ratings. The industry had 15 companies that scored the consultancy’s lowest F rating on governance.

In recent years, several energy companies have been attacked by shareholders for excessive pay and wasteful spending by executives, including Chesapeake Energy, SandRidge Energy, Occidental Petroleum and Nabors. Energy companies accounted for around 160 companies of the 2,800 in GMI’s rated sample, around 6 percent. The sector accounted for 15 percent of companies with the lowest rating.

Only two technology companies scored the lowest governance grade on the GMI rating scale. But 41 technology companies out of a larger sample had multiple share structures that gave some owners more votes than others - 14 percent of the 283 businesses with such a structure. These included Google, LinkedIn and Facebook. Technology companies represented 9 percent of the companies in the GMI sample of 5,900 companies.

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