The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s an interesting piece from Towers Watson’s Marshall Scott and Steve Seelig about the current state of pledging in the wake of ISS’ latest policy on the topic. Here is an excerpt:

Many of our clients are working to respond to the proxy voting policies of Institutional Shareholder Services, which for many companies has included an outright ban on stock pledging by executives. ISS policy states that “[p]ledging of company stock in any amount as collateral for a loan is not a responsible use of equity,” adding that pledging may have a detrimental impact on shareholders if the officer is forced to sell (such as to meet a margin call) (italics added).

While we understand the ISS concern that executive sales of large quantities of company stock may depress the market value of the shares, particularly in situations where other events already have created downward pressure on the stock price, we believe the circumstances where this might take place are rare, and we could argue that these companies would have continued on a downward spiral despite the executive sales. In fact, it’s possible the ISS policy will have an unintended consequence that negatively affects shareholders if anti-pledging policies discourage executives from holding company stock.

Academic research continues to find a direct correlation between the level of CEO stock ownership and favorable return to shareholders. The most recent of these studies1 finds that CEOs who receive large blocks of their company’s stock as part of their compensation package tend to spearhead fewer but superior deals that maximize shareholder value and produce better returns. This study references a long line of prior research that similarly ties higher levels of CEO stock ownership to better shareholder returns.