Comments on: Executives Selling Shares to Meet Margin Calls

By: dlr

dlr — Tue, 21 Oct 2008 12:53:00 +0000

Exactly. Pledging something as collateral doesn’t decrease your exposure in any way. The real question is, are executives required to disclose short positions they hold in the company stock (or bonds)?

By: Lune

Lune — Mon, 20 Oct 2008 18:14:00 +0000

I agree with anon-6:34.

Merely borrowing against your stock holdings doesn't necessarily undercut your incentive, since you still want that stock to improve in value, and you will still be materially affected by future movements in the stock price.

But my understanding is that many, many CEOs and other executives with stocks execute hedges and other arrangements so that they can essentially "sell" their stocks (i.e. get cash based on current price, with no further gain or loss based on future movements in the share price) without actually selling them so as to avoid having to disclose that insiders are dumping their stock. This is the real travesty, and should be required to be reported. Unfortunately, I'm not sure how the SEC can require reporting since most of these hedges are private arrangements.

By: Mara

Mara — Mon, 20 Oct 2008 17:25:00 +0000

I have to counter this premise of “They own a lot of stock — they are really committed” since I’ve encountered that attitude in quite a few people. I’d say the real problem is that stock prices are decoupled from the overall company performance they are meant to reflect. It’d be more accure to say that the execs are committed to jacking the numbers so that the stock’s doing well just in time for their options to be exercised. Then crashed when it’s time to be gifted more shares.
As for the premise of the article, I agree that the disclosures are too few and too vague to be of help to the avg shareholder. I’m a big fan of cash accounting, no intangibles, no booking future sales ahead. I feel the CEOs job is to get the productivity of the company up, not to play accounting tricks. I’m not very popular with the MBAs at parties…

By: njh

njh — Mon, 20 Oct 2008 12:39:00 +0000

I think $1 billion may be underestimate. McClendon and Simpson (CHK and XTO) alone are more than $1 billion. I guess it depends on where the stock was sold:
Chesapeake CEO Forced to Sell All His Stock (and implications for NG

By: Anonymous

Anonymous — Mon, 20 Oct 2008 10:34:00 +0000

"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."

Simply borrowing against shares doesn't undercut equity ownership. Executives that borrow against shares have every incentive to keep their company's stock up so that they won't lose money in order to cover borrowings.

What undercuts equity ownership is when executives have hedges of their equity positions, through put forward sales, options, equity swaps, etc. Those things should be disclosed, especially if coupled with borrowings from the counterparty, such that they've hedged risk and gotten cash in hand.

By: Sergei

Sergei — Mon, 20 Oct 2008 10:26:00 +0000

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.