In 2008 SandRidge signed a five-year sponsorship agreement with the Thunder, costing the company about $3,275,000 annually. When the team qualified for the playoffs last year, the same sponsorship agreement required the company to pay out an additional $612,000. In 2009, SandRidge entered a four-year agreement to license a suite at the Thunder’s home arena.
This sponsorship decision could be good for the company in that it provides a valuable marketing opportunity. However, the fact that two board members have sizable personal financial interests in the Thunder makes me worry that this decision could be at least partially driven by the board’s willingness to help Ward and Dobson line their own pockets at the expense of shareholders.
Given the abundance of marketing opportunities that are available, I prefer my companies to avoid even the appearance of such misconduct. The willingness to engage in questionable deals like these suggests to me that there may be a larger pattern of shady dealings.
Don’t forget that Chesapeake Energy Corporation (NYSE:CHK) also sponsored the Thunder while then-CEO Aubrey McClendon also held a sizable stake, and that this shady dealing was part of a larger pattern in which McClendon mixed personal interests with business interests in ways that were arguably detrimental to shareholders. Also, like Chesapeake Energy Corporation (NYSE:CHK), SandRidge offered its CEO and chairman the opportunity to take a stake in company-owned wells. But Ward’s perk was even more lucrative than McClendon’s. Ward had the ability to take a 3% stake in each company well, while McClendon had to settle for a 2.5% stake.
Other questionable dealings
Besides the Thunder, SandRidge has financial relationships with two other businesses in which Tom Ward or his family have a sizable stake — TLW Land & Cattle and WCT Resources. According to the disclosures, SandRidge paid these companies more than $2.5 million in 2012 in royalties, lease payments, and asset purchases. The proxy failed to provide any information about how these deals were priced and whether SandRidge was getting a good deal.
The Foolish takeaway
I believe an abundance of related-party transactions, and the board’s repeated approval of management’s decisions that can put their personal interests at odds with the larger business interests, should raise a red flag for investors. It can reflect a view among board members that the company belongs to company insiders rather than shareholders. At SandRidge, I’m concerned that this is exactly what is occurring.
The article Does Cronyism Compromise Shareholder Value at SandRidge? originally appeared on Fool.com.
Motley Fool contributor M. Joy Hayes, Ph.D. is the principal at ethics consulting firm Courageous Ethics. Joy has no position in any of the stocks mentioned. Follow @JoyofEthics on Twitter. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.
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