In October 2007, Steven Crane aimed to align himself with shareholders in a big way. The CFO of ModusLink Global Solutions bought 10,000 shares of company stock at $13.80 a share. If the decision made him a better CFO, as management gurus would assert, he is certainly the poorer for it now. As of early January, the stock was trading at about $3.50 a share. On paper, the 75 percent drop in value drained $103,000 from Crane’s net worth — about a quarter of his salary. That bad news came just as ModusLink suspended executive bonuses.
Crane is far from alone. Among public companies, about 135 finance chiefs have invested more than $100,000 in company stock in single transactions since September 2007. As 2009 began, about 100 of them faced real losses on those purchases, according to CFO magazine’s analysis of data supplied by InsiderScore. American Express CFO Daniel Henry has lost $686,000 of the $1.1 million he put into company stock in November 2007, soon after becoming CFO. David Wolf, CFO of Berry Petroleum, bought five times in 2008, with an average paper loss of 43 percent on his $581,579 investment as of early January.
Might this prompt a reevaluation of the wisdom of executive stock ownership? Not according to most corporate-governance experts. Shared risk — especially on the downside — dodges the moral hazard of executives plumping up short-term results at the expense of long-term success, says Ira Kay, global director of compensation at Watson Wyatt Worldwide. Equity stakes encourage managers to behave like shareholders and maintain a keen focus on optimal total returns. Paul Hodgson, a senior corporate-governance research analyst at The Corporate Library, agrees. “The whole point of owning stock,” he says, “is so that executives are exposed to the same losses as shareholders.”
Even those who have suffered losses appear to be unshaken. In their view, risk goes with the turf and will ultimately prove beneficial. “In Steve [Crane]‘s case, and in my case as well, we saw volatility as an opportunity,” says Michael Mardy, a member of ModusLink’s compensation committee and the CFO of luggage maker Tumi Inc. (At press time, Mardy was facing a 50 percent loss on the $6,100 worth of ModusLink shares he bought last October.) “If we’re in it for the long term, the money will grow,” he says.
A few CFOs have chalked up gains despite the widespread plunge in the market. Joseph D’Amico has seen his $445,000 investment in Apollo Group stock grow 92 percent since last April. First Bancorp CFO Fernando Scherrer has posted a 55 percent gain on a $144,000 investment made in November 2007. But in the wake of the stock market’s worst year since 1931, they are among a small cadre of exceptions. All told, in the roster of large inside CFO buyers, losers outnumber winners three-to-one.
For corporate boards charged with retaining key executives, depressed stock prices pose a serious hurdle. Designed as much to attract and hold talented managers as to reward them, long-term stock incentives could backfire if prices stay down for a prolonged period. New job offers that carry incentives pegged to recently updated stock values may look much more appealing than a long uphill climb to break-even. As a result, Mardy’s comments notwithstanding, some boards may be tempted to tinker with stock-related compensation.