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Skin in the Game

Why, on the whole, CFOs should buy more of their companies' stock.

For the moment, investors don’t seem to be using level of stock ownership as a key litmus test for the quality of corporate governance. Many think the guidelines are a step in the right direction and don’t want to quibble about the numbers just yet. “It’s important, but we don’t necessarily maintain specific standard levels. You want to look at it on a company-by-company basis, and consider the tenure of executives,” says McGurn. Other big investors and investor advisers, including TIAA-CREF and The Corporate Library, say the same. After unsuccessfully mounting a proxy proposal to make Dell executives and directors hold 75 percent of the stock granted to them, the American Federation of State County and Municipal Employees has moved on to other aspects of executive compensation, namely lobbying for bans on tax gross-ups and proposing limits on insider sales during company stock buy-backs.

In the end, CFOs would do well to consider what message they send the market when they fail to buy their own stock. “Executives shouldn’t buy a stock because of guidelines, they should buy it because they have confidence in the company,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “If you don’t hold it, who should?”

Alix Stuart is a senior writer at CFO.

Sweetening the Buy-In

How Companies Make It Easier on Executives

Executive-compensation experts are hard-pressed to name a company that requires executives to buy stock, as Unilever CFO James Lawrence did last fall. However, more are offering to match whatever purchases an executive makes, says Ira Kay, global practice director of executive-compensation consulting at Watson Wyatt Worldwide. These days, Watson Wyatt is seeing more interest from companies in setting up programs where executives can use pretax dollars to buy the stock, often for a full or partial match. “That buying-in is a completely different psychology than getting a stock grant. No one ever washes a rented car,” says Kay. Such programs are also popular in the UK. Cadbury-Schweppes, for example, allows about 170 senior executives to invest their cash bonuses in shares, for up to a 100 percent match (depending on company performance).

Outside investors, of course, like the idea. TIAA-CREF rates executive stock purchases very highly, says head of corporate governance Hye-Won Choi, because it better aligns managers with shareholders. CFOs, however, say laying out cash isn’t as important as some think. “When you have stock that you could sell at any time, I don’t think there’s much difference between that and putting cash out,” says Jeffrey Jones, CFO of Vail Resorts Inc. “In either case, it’s cash.” — A.S.

Selling Out
Notable CFO stock-selling in recent times
Company CFO Buys Sells* Base Salary 2006 Last Transaction
Goldman Sachs David A. Viniar $0 $32.5m $600,000 10/30/07
Southwestern Energy Gregory D. Kerley $0 $26.2m $310,000 12/12/07
Valero Energy Michael S. Ciskowski $0 $22.9m $465,000 10/16/07
McDonald’s Matthew H. Paull
(now retired)
$0 $15.6m $683,333 12/13/07
Brink’s Robert T. Ritter $0 $11.6m $456,750 11/7/07
*Total sales from 1/1/07 to 1/31/08, including both open-market sales and sales following options exercises. Source: InsiderScore.com, company proxy statements


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