Another symptom of equity-market distress. And the New York Times also provides an interesting discussion of the behavioral implications of corporate officers borrowing against their holdings:
When executives own big stakes in the companies they run, investors can rest a little more easily at night, knowing those managers have the shareholders’ best interests at heart.Except when maybe they don’t….
Already this month, there have been about $1 billion in sales by company insiders dumping stock to meet margin calls, as lenders’ demands for the stock sales are known. According to Equilar, an executive compensation research firm in Redwood Shores, Calif., executives at three dozen companies have disclosed such sales since October….
Under Securities and Exchange Commission rules, executives are typically required to disclose insider sales within two days of making them and indicate why they were sold, including as a result of a margin call. But experts say there are no rules requiring that the public be told ahead of time that an executive has pledged stock in a margin loan or how the borrowed money is being used. It might be a loan to buy more shares of the company’s stock — which would indicate a vote of confidence in the shares. Or it might be a loan to buy some other company’s stock or something else altogether — possibly a sign that the executive thinks there are better places to invest.
“The disclosure rule is vague,” said Ben Silverman, director of research at InsiderScore, which tracks the buying and selling of company insiders.
Over the last 25 years or so, investors have come to take on faith the need for executives to own significant amounts of company stock, as a way to make sure the interests of the people running a company are aligned with those of the shareholders. But the ability to use the shares as collateral for a loan may change that dynamic, said Charles M. Elson, a corporate governance expert at the University of Delaware.
“It may be at certain levels de-aligning,” he said. Although individual circumstances may not require public disclosure of an executive’s decision to pledge the stock, Mr. Elson said, he argues that the boards of directors should be told.
Paul Hodgson, a senior analyst at the Corporate Library, a governance research group, says it is too easy for investors to be misled when executives are not holding the stock outright. “The disclosure is a problem,” Mr. Hodgson said. Most investors will look at the executives’ holdings in the proxy statement, he said, and say, “ ‘They own a lot of stock — they are really committed.’ ”
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I don’t quite agree with the thesis in the NY Times article that executives who margin their shares have misaligned their interest with other shareholders. These executives have in effect borrowed to fund their stake, in effect applying leverage to their position. However, they are still long the equity, and would benefit when share prices go up, and therefore, their interests are still aligned with minority shareholders.