Based on a NASPP/Deloitte survey, respondents using a multi-day trailing average closing price to convert their target equity award values into a number of shares increased from 27% in 2019 to 42% in 2022. I remember many companies switching from a single closing price to an average (for example, the 30-trading-day average closing price ending the day preceding the grant date) in 2020 due to COVID volatility. I suspect some of those companies made the change and never looked back.

As this NASPP blog argues, there are a lot of good reasons to make this switch — especially with the stock price volatility we’re seeing today — but there are also some traps for the unwary. The blog uses this fictitious example to show the inconsistent outcomes that a single-day closing price can cause:

My fictitious company is granting RSUs to two employees . . . Each employee is to receive an RSU worth $10,000. Employee A’s RSU is granted on February 20, when the stock price is $34 per share. Employee B’s RSU is granted one month later, on March 20, when the stock price has dropped to $23 per share.

If we use the FMV on the grant date to determine the number of shares in each grant, employee A will receive a grant for 294 shares ($10,000 divided by $34 per share) and employee B receives a grant for 434 shares ($10,000 divided by $23 per share). Employee B’s grant is almost 1.5 times the size of employee A’s grant. Not because employee B deserves more shares but merely because employee B’s grant was timed fortuitously . . .

Using even just a 30-day average would have smoothed out the differences between the two grants considerably. The 30-day average for Employee A’s grant is $33 per share. The S&P 500 was fairly stable for the 30 days leading up to February 20, so the 30-day average doesn’t have a big impact on Employee A’s grant. It would be for 303 shares instead of 294 shares.

But using a 30-day average has a significant impact on Employee B’s grant. The 30-day average on March 20 is $30. This reduces the size of Employee B’s grant to 333 shares, which is more comparable to the grant that Employee A received just a month before. The current value of both grants is also more comparable. After six months, when the stock has recovered to $34 per share, the value of employee A’s grant is worth a little over $10,000 and Employee B’s grant is worth a little over $11,000.

Using averages also means that grant sizes are more predictable, making it easier to forecast share usage and less likely that the company will use its plan shares more quickly than anticipated. It does, however, complicate things a bit — what you communicate to your executives will match the target values you describe in your Compensation Discussion & Analysis section of your proxy statement (which will also explain the average price used for the conversion), but it will not match the company’s accounting expense or the grant date fair value reported in the proxy statement tables for named executive officers. But communication and disclosure shouldn’t drive business decisions, and the blog suggests you do your own analysis.

What do you do right now? NASPP is updating their survey, and if you want to participate (to access to the full survey results), it closes this Friday — May 9!

– Meredith Ervine 

The Trump Administration moved quickly in its first 100 days to implement the “deregulation” part of its regulatory agenda. We’ve shared a number of deregulation developments on TheCorporateCounsel.net, including:

– The first deregulation Executive Order saying that whenever an agency promulgates a new rule, regulation, or guidance, it must identify at least 10 existing rules, regulations, or guidance documents to be repealed;

– The second deregulation Executive Order and subsequent memo saying all agency heads should prioritize repealing regulations that could be struck down as overreach or otherwise unlawful under recent Supreme Court cases, and do so without notice and comment where consistent with the Administrative Procedure Act’s “good cause” exception (likely to be litigated);

– A letter from members of the House Financial Services Committee to then Acting Chairman Uyeda calling on the SEC to withdraw several final and proposed rules — notably including two Corp Fin rules, one being Pay Versus Performance; and  

– Most recently, the Trump Administration’s new suggestion box for the public to “submit your deregulatory vision” — i.e., a new online form on Regulations.gov run by the General Services Administration and the Office of Management and Budget where the public can submit ideas for bothersome rules and regulations they’d like to see on the chopping block.

In his blog on the suggestion box, Dave asked, “Which SEC rules and regulations are you going to drop a dime on to the GSA/OMB?” So let’s run an anonymous quick poll!

This poll is all just fun and games, but I should note that some of these rules are Congressionally mandated, in which case it’s not likely that they’d be done away with completely, but I’m sure there are tweaks we’d all welcome!

– Meredith Ervine 

A recent study from a group of finance professors reinforces the rationale for director stock ownership guidelines. Based on analyzing 5,000+ companies from 2008 – 2021, the authors found that director equity is correlated with a lower likelihood of a stock price crash – but the strength of the correlation depends on the characteristics of the board and the company. Here are a few risks that directors who have “skin in the game” are likely to avoid:

1. Over-Investment

Prior studies have linked over-investment—particularly in low-return projects—to crash risk. When directors are inattentive, managers may engage in empire building or value-destroying acquisitions. We find that higher DEC is associated with significantly lower levels of abnormal investment, consistent with enhanced board oversight discouraging inefficient capital allocation.

2. Financial Misreporting

We use future financial restatements flagged as fraudulent (from the WRDS non-reliance dataset) as an indicator of opaque reporting. Firms with more equity-compensated directors are significantly less likely to restate their financials due to fraud, suggesting improved monitoring of accounting practices.

3. Bad News Hoarding

Delayed disclosure of adverse information is a central cause of crash risk. Using a standard event-study approach, we find that cumulative abnormal returns around earnings announcements are more negative when firms report bad news—especially when DEC is low. However, this stock price decline is significantly muted in firms with high DEC, indicating that bad news is more likely to be released in a timely and incremental fashion, rather than building up and triggering a crash.

Collectively, these findings support the enhanced monitoring view: DEC reduces managerial opportunism and strengthens governance.

There’s no one-size-fits-all. The analysis found that the benefits of director equity compensation were greatest at companies that had entrenched management, more opaque financial reporting, and transient institutional investor ownership – and when directors were well-qualified and not overcommitted. The data also seemed to show that the benefits of director equity ownership were most pronounced, and stock price crashes less likely, among boards that had a relatively higher proportion of women directors.

– Liz Dunshee