Professor Nitzan Shilon’s research on CEO stock ownership policies was cited in High-Multiple Stock Requirements Rise, an article featured in the December 4, 2017 issue of Agenda, a Financial Times publication devoted to issues concerning corporate directors and boardrooms. The article reports on a rise in CEO stock ownership polices among S&P 500 companies, including increases in the median stock-ownership requirement. Pros and cons of these trends were discussed in the article, which drew on Professor Shilon’s research in CEO Stock Ownership Policies – Rhetoric and Reality, in which he questions the efficacy and transparency of most stock ownership policies.
Following is an excerpt from High-Multiple Stock Requirements Rise:
Indeed, recent academic research has also called these policies into question. Nitzan Shilon, professor at Peking University School of Transnational Law, authored a 2015 paper in the Indiana Law Journal that discussed several concerns.
One of the big ones is accountability, he says. Practically none of the policies describe the consequences of a CEO’s dipping below the stock-ownership threshold. Many of the plans allow CEOs to count unvested stock toward stock-ownership minimums, and very few adopt meaningful stock-retention policies, he says. And most of the grace periods — the years during which CEOs are able to amass stock to meet the threshold after being hired for the job — are not much shorter than the average tenure for a CEO. A five-year grace period does not mean much for a CEO whose tenure will most likely not last more than nine years, the average tenure for a departing S&P 500 CEO in 2016, according to The Conference Board.
According to Shilon’s research, two thirds of Fortune 250 policies would allow CEOs to unload all of their stock without facing consequences. The other problem, he says, is that this ineffectiveness is camouflaged.
“With stock-ownership policies, the firm explicitly states that those polices help to achieve certain goals, such as alignment with shareholders, curb of excessive risk taking, that they should work against short-term policies. They hold the policies to have very important goals, but at the same time, most of them basically hold policies that do not have any bite,” Shilon says, in an interview with Agenda.
“They’re paper tigers in reality, but they’re held to attain very important goals.”