Reuters published an investigative report on SandRidge Energy Inc. (NYSE:SD) pointing out how founder and CEO Tom Ward mingled his own financial interests with those of the company with the use of tactics similar to Chesapeake Energy Corporation (NYSE:CHK)'s CEO Aubrey McClendon. Does this development make SandRidge any less of an investment opportunity?

What Happened?

For many years, Ward and McClendon had joined hands to build Chesapeake into the second-largest natural gas producer in the United States. Ward has melded his own financial interests with those of publicly traded SandRidge much more than many of the company's shareholders realize as seen in Reuters' scrutiny of court documents, Oklahoma state records and Securities and Exchange Commission filings. Ward has been criticized by shareholders and analysts for treatment of a public company like a private firm and paying himself outsized salaries and bonuses, even during periods when the company was struggling. Ward also received personal loans from the chairman of Bank of Oklahoma, a major bank for the company. Many analysts believe that the mixing of personal and corporate roles posed a potential conflict of interest for Ward.

In addition to borrowing $75 million from the chairman of Bank of Oklahoma, Ward also collected $67 million from SandRidge for selling back his personal interests in a controversial corporate perk, namely stakes in the company's wells. The company has also paid almost $28 million more to Ward or firms linked to him or his family, according to SEC filings. These payments are in addition to the more than $116 million Ward has received in compensation as CEO since 2007. Some analysts and shareholders have wondered why Ward earned so much in relation to the company's size and stock price. As natural gas prices have plummeted, SandRidge shares have declined from a high of $69 in July 2008 to around $7 today. SandRidge has disclosed the benefits that Ward was granted and that there is nothing illegal about the compensation packages.

SandRidge paid millions to Ward and his family, in addition to his salary and bonus. This includes $5 million to lease property and pay royalties to WCT Resources, a Ward family-controlled energy company, almost $4 million in royalties to TLW Land & Cattle, an Oklahoma firm controlled by Ward, over $18 million to sponsor and license the Oklahoma City Thunder basketball team, in which Ward owns a 19% interest, and around $850,000 to buy tickets to "various sporting and other entertainment events" from Ward.

Shareholder Action

Two large SandRidge shareholders, hedge fund TPG-Axon Capital and investment firm Mount Kellett Capital, have been pushing to replace Ward and the board and to put the company up for sale. The value of the company will rise if shareholders vote to replace the company’s board in a proxy contest brought by TPG-Axon Capital Management LP, CEO and hedge fund manager Dinakar Singh said.

A second shareholder, Mount Kellett Capital Management LP, is also demanding the ouster of SandRidge founder and CEO Tom Ward and a sale of the company. Mount Kellett has sent a letter to the board asking for an investigation to establish whether Ward and his family profited improperly from their ties to the company. The letter also said that SandRidge’s board should retain the services of independent lawyers and accountants to investigate business transactions between Ward, his son Trent Ward, and the company and that Ward should be suspended until completion of the probe. TPG-Axon is soliciting shareholder votes to replace SandRidge’s directors and voting is in progress.

The Question of Compensation

One of the major issues with TPG-Axon is that company's executives have been richly rewarded over the past five years while its stock price dropped 80%. CEO Tom Ward, with a total compensation of $25.2 million, was among the highest-paid energy executives in 2011, even though the company ranks in the bottom half of publicly traded exploration and production companies by revenues. Regulatory agencies require public companies to set their executive compensation on the basis of comparisons with similar firms.  Sandridge offers two lists made up of midsize and large companies respectively.

The midsize list includes Pioneer Natural Resources (NYSE:PXD) , while the large companies list includes Chesapeake. In the most recent quarter, Pioneer Natural Resources' revenue growth was higher than the industry average of 6.9%. The company's revenues jumped 21.1% since the same quarter of 2011. The company's net profit margin currently stands at 2.71%, which trails the industry average.

The midsized companies’ median revenues of $1.95 billion are slightly higher than SandRidge, but the median executive compensation of $6.1 million was less than one quarter of Ward's compensation.

Chesapeake's quarterly profit margin currently stands at -69.19%. Chesapeake's year-on-year quarterly revenue growth is at -25.32%.

The large companies had revenues between $4.1 billion to $16.7 billion, with a median of $11 billion (much larger than Sandridge), but the median CEO pay was only $15.2 million.

James Bennett, SandRidge's executive vice president and chief financial officer, received $7.7 million in 2011 while president and chief operating officer Matthew Grubb received $6.8 million, Executive compensation problems generally signal corporate governance issues.

Conclusion

Regardless of the issues that have been raised, the company clearly has problems in maintaining high standards of corporate governance. I would not recommend investing in a company with corporate governance problems, regardless of the value. However, it is true that the underlying assets in the case of Sandridge are valuable and, if you already have an investment, I would recommend holding onto it until these issues are resolved.

The article Bad Ethics Outweigh Assets for This Energy Player originally appeared on Fool.com and is written by Jordo Bivona.

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