How to Align Executive and Corporate Board of Directors’ Interests

January 17, 2018

Investors and corporate board of directors want to ensure that the interests of executives and shareholders are aligned over the long term. The instruments most used to create this alignment are ownership requirements and post-vesting/exercise holding periods. In this Farient Brief, we explore post-vesting and exercise holding period policies for companies in the S&P 500.

“While investors are focused on ensuring that management interests are aligned with shareholders’, it’s curious that post-vesting/exercise holding requirements have not really caught on a big way, even though they have been discussed and supported by investors and proxy advisory firms for years since the Enron/WorldCom scandals.” – Dayna Harris, Farient Partner

Ninety-five percent of S&P 500 companies currently have ownership requirements for executives.   Many of the small percentage of companies that don’t are founder-led companies, such as Facebook, Netflix and Amazon, or closely held companies, like Viacom. Clearly, the corporate board of directors at these companies haven’t felt a need to create ownership policies given the already strong alignment between shareholders and key executives. Evaluating the prevalence of ownership policies by sector finds minimal variance to the norm, with one exception; the Consumer Discretionary sector, where 8 of the 76 companies (11%) do not have ownership requirements. These include the four companies referenced earlier and companies like Garmin, Dish Network, and D.R. Horton. All these companies have a strong founder presence, either with executives or with the corporate board of directors.

The use of post-vesting/exercise holding periods is different than hold until ownership guidelines are met. Fifty-seven percent of S&P 500 companies have some sort of holding period; however, 50 percent of these are just holding requirements to meet ownership guidelines and only 6.8 percent have true post-vesting/exercise holding requirements. Of the 6.8 percent with true post-vesting/exercise holding requirements, 3.1 percent designate a specific time period, 3.5 percent have a hold until retirement requirement, and 0.2 percent have both.

The top third of S&P 500 companies, by revenue, is more likely than the bottom two-thirds to require holding periods until/beyond retirement or for a stated period of time. Use of ownership policies also varies significantly by sector. Among financial companies, 16 percent require holding shares until/past retirement, which is twice the percentage of the next highest sector, Health Care. An additional 11 percent of financial companies designate a specific time period. One company, Capital One Financial, has both policies. Also noteworthy, 82 percent of S&P 500 utilities require holding shares to meet ownership guidelines vs. the 50 percent overall prevalence for the S&P 500, which is 27 percent more than the next highest sector, Energy, at 55 percent.

Interestingly, at a time when regulatory uncertainty and best practices are being put to the proverbial test, even ISS, which historically required a 36-month post-vesting/exercise holding period for a new employee share authorization proposal to shareholders to earn its “full points,” has now revised this requirement downward to 12 months.

 

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