Just when we thought 10b5-1 trading plans had been perverted so far as to be the last refuge of the insider trade and that was it, along comes another idea for executives to sell their stock and have somebody else lose their shirt on it if the stock price – their own company’s stock price we’re talking about here – goes into a tailspin.
Announcing the latest, the greatest, the pre-paid variable forward contract.
A recent Gradient Analytics report found that many of these contracts actually preceded stock price declines or, as it says with magnificent understatement, “unusual levels of negative corporate events.”
I thought to myself no one can actually be doing this, can they. I mean, surely its illegal. Or just so horrible that no one would dare.
But no, even a cursory search by researchers at The Corporate Library turned up several examples. All of these, plus a list of companies that ban such arrangements – the only acceptable thing to do – can be found in my latest short report in our “Investing in Corporate Governance” series, called “Investing in Corporate Governance: Forward Sales." (Download a copy from our online store at http://www.thecorporatelibrary.com/info.php?id=76.)
The first example we found involves two directors at Freeport-McMoRan. Both B.M. Rankin, who is a member of the company’s public policy committee, and James Moffett, the current chairman of the board and former CEO, have engaged in pre-paid forward contracts via a limited liability company and a limited partnership, respectively, of which they are members or sole partners.
This is just not on.
While diversification is a general principle in stock ownership, the same rules do not apply to executives and directors. If these individuals do not want to hold company stock, if they do not want to be exposed to the risk, they should refuse it when the company offers it to them as compensation.
Paul Hodgson — Senior Research Associate
