When industry deregulation reared its competitive head in the mid- 1990s, the board of San Francisco based Pacific Gas & Electric Co. looked for a way to refocus the priorities of executives and senior managers.
“The company needed to change the game, from climbing the corporate ladder to creating wealth over the long term for shareholders,” says recently installed CFO Peter Darbee.
So the renamed PG&E Corp. set up a plan in 1998 to require executive stock ownership. The program, typical in design, required the CEO and chairman to own three times their salaries in stock, CEOs of the company’s business lines to own twice their salaries, and all executives at the vice president level and above to hold one and a half times their salaries.
PG&E has been far from alone in requiring, or at least encouraging, such ownership. Roughly a decade ago, when the last recession walloped corporate earnings and share prices, shareholders and corporate-governance activists began pushing for adoption of such a requirement. As a result, many of the largest companies now embrace the idea. At last count, 178 of the Standard & Poor’s 500 required some degree of stock ownership, up from 30 in 1993.
But as PG&E’s experience also attests, implementing stock ownership requirements doesn’t guarantee superior performance, as its stock went south last year. To be sure, a recent study by CFO magazine suggests that, as a group, companies opting for holding requirements performed better in the years after adoption, on an absolute basis. But compared with companies that skipped such programs, adopters still underperformed.
Those results don’t come entirely as a surprise. Companies often adopt stock-ownership plans only after underperforming, so they’re starting out from behind. “When companies are doing badly, that’s when they have been most open to doing new things, such as adopting ownership guidelines,” says Nell Minow, former principal at activist investment firm Lens Inc., and now editor of TheCorporateLibrary.com, an Internet site that compiles information on corporate best practices.
This may help explain why the movement toward holding requirements has recently tapered off, with just one company in the S&P 500 introducing an ownership requirement in 1999. With the rising tide of the bull market lifting a lot of boats, pressure on companies to adopt ownership requirements has abated. Anecdotal information from consultants and corporate executives also suggests that more executive teams are taking advantage of ownership opportunities of their own free will.
But that could change if the recent downturn in much of the stock market continues. “Choosing to increase or require executive ownership has always been a great signal to investors that management is bullish on the company’s prospects, and that they will put their money where their convictions are,” says Minow.
Much, however, depends on how these programs are designed. In fact, both consultants and shareholder activists have criticized some plan designs as defeating their stated purpose, in essence creating empty initiatives meant to wow impressionable investors. These plans typically pay only lip service to the idea that management is putting its own money on the line.