May 23, 2004
Insiders Are Selling Like It's 1999
By ERIC DASH and DAVID LEONHARDT
THESE seem to be the glory days for Zimmer Holdings. Its stock price has almost tripled since it was spun off three years ago from Bristol-Myers Squibb. And every day, more and more of its hip and knee replacements are being inserted into the aging bodies of baby boomers.
When Ray Elliott, Zimmer's chairman and chief executive, is asked whether the good times are going to last, he often answers: "The good times aren't here yet." Maybe so, but the times already seem very good for Mr. Elliott and two of his top lieutenants. They cashed out 30 percent to 70 percent of their Zimmer stock, making a combined $28 million.
Across corporate America, executives have been selling company stock as if it were 1999. Even amid this resurgence of insider selling, however, a few dozen executives - including those at Zimmer - stood out for having unloaded supersized portions of their personal stakes in their company's future. At Wendy's International, Qualcomm, Occidental Petroleum, Boston Scientific and Comverse Technology, one or more executives sold at least half their holdings, according to a SundayBusiness analysis of hundreds of big companies.
The magnitude of insider selling, many governance experts say, suggests that even after more than two years of scrutiny, corporate America has yet to figure out how to link pay and performance. No matter what happens to profits or stock prices over the next year, some executives have already locked in multimillion-dollar paydays. Even if their corporate strategies fail in coming years, they could still retire with bank accounts fit for a king.
"You see boards of directors trying to align the incentives of shareholders and managers," said David L. Yermack, an associate finance professor at New York University. "And then you see managers turn around, trade in the marketplace and try to undo what the board is trying to do."
The dollar value of insider sales gets plenty of attention, but the portion of company stock and exercisable stock options an executive sells is easy for investors to miss. That is because companies report executives' holdings and sales in different Securities and Exchange Commission filings. Many corporate governance experts and investment advisers say that such figures - which measure the amount of stock that executives did sell as a fraction of what they could sell - are an important gauge of insider sales. The percentages are a yardstick for just how much executives are willing to tie their personal fortunes to those of their companies.
"You would think," said Richard C. Ferlauto, who helps run a pension fund at the American Federation of State, County and Municipal Employees, a large labor union, "that an executive would be motivated to hold on to significant amounts of their options because they believed in their strategy and their company's growth under their leadership."
Of course, corporate executives are entitled - and often advised by financial planners - to sell some of their holdings. The Zimmer executives sold to diversify their portfolios, said Brad Bishop, a company spokesman. "I don't think it reflects anybody's lack of confidence in the company," he said.
Officials at other companies offered similar reasons. Paul Donovan, a spokesman for Boston Scientific, said Lawrence C. Best, the chief financial officer, deserved to reap the rewards of a decade-long climb in the stock price. Mr. Best cashed out $152.1 million in company shares, most of it from long-held options.
Executives elsewhere may have wanted the money for retirement or estate planning, company representatives said. Others said that the executives continued to hold substantial numbers of options that would become exercisable in the future.
The surge of selling also suggests that many executives realized that stocks remain decidedly expensive, despite the bear market of 2000 to 2002. The Standard & Poor's 500-stock index closed on Friday at a price-to-earnings ratio of about 20, well above its historical average.
Insider sales have slowed in recent weeks as the market has fallen, but the amount of money made this year remains impressive. Executives sold $14.4 billion worth of stock in the first four months of the year, up from $4 billion in the period last year, according to Thomson Financial.
"We have been tracking insider sales since 1971, and in the last few months they have never been higher," said David Coleman, editor of Vickers Weekly Insider Report. "There has been some pullback in the last few weeks."
Of the 1,179 executives whose stock sales were examined, 419 sold company shares from July 1, 2003, to April 7 of this year, according to the SundayBusiness analysis, which used data from Thomson Financial. Fifty sold more than a third of their holdings, including 14 who sold more than half. Todd S. Nelson, the chief executive of the Apollo Group, an education company that owns the University of Phoenix, topped the list by unloading 93 percent. Close behind were Dale R. Laurance, the president of Occidental Petroleum, and John T. Schuessler, the chairman and chief executive of Wendy's. Average sellers at large companies cashed out about one-seventh of their holdings. Among big-name executives, John T. Chambers of Cisco Systems, Craig R. Barrett of Intel and Bill Gates of Microsoft each sold less than one share in 15. Meg Whitman of eBay and Jeffrey R. Immelt of General Electric sold less than one in 100. Samuel J. Palmisano of I.B.M. sold no shares.
FEW executives have increased their holdings over the last year by buying shares with their own money, as opposed to receiving new grants from their boards. James M. Kilts, the chief executive of Gillette, was one of about 20 executives who added to their holdings by buying shares between July and April. He bought $609,000 worth of Gillette stock, slightly increasing his holdings.
Across corporate America, executives bought just $430 million of stock in the first four months of this year, down from almost $1 billion in the period four years ago, according to Thomson Financial. As a result, the ratio of insider purchases to sales is near its lowest in decades.
Having received enormous option grants in recent years, executives appear to have much less motivation to buy stock with their own money. At most companies, there is little to prevent most executives from selling shares during what could turn out to be a brief spurt in the stock price. With stock and options now accounting for most of a top executive's pay, that freedom may well be doing more than anything else to keep pay unhinged from performance.
The post- Enron mood has brought some small changes. At least 30 big companies, from Campbell Soup to Citigroup, have adopted "retention" programs, requiring top executives to hold a fixed percentage of their shares, after selling some to pay taxes, for at least a year or two, according to Towers Perrin, the compensation consulting firm. Most of the companies have adopted the rule in the last 18 months, pay experts said.
But a year or two is not many investors' idea of long term, and some have begun trying to force companies to enact stricter policies. The goal, they say, is to prevent companies from treating stock options like a bottomless A.T.M.
For 2004, shareholders at eight companies submitted proposals that would require top executives to hold on to substantial portions of shares they receive from exercising options, according to the Investor Responsibility Research Center in Washington. Just three such proposals were submitted to companies last year.
At the Adobe Systems shareholder meeting this April, for example, the pension fund for the government employees' union proposed requiring top executives to retain at least 75 percent of all options-related shares until they leave the company. The measure failed, but received almost a third of the vote, more than most shareholder proposals do.
The pension fund's proposal said Bruce Chizen, Adobe's chief executive, held "a paltry 1,906 shares outright" in 2002, even as he exercised options for 150,000 shares, then sold the stock for a $3.9 million profit. Adobe opposed the proposal, and a similar one last year. But in February 2003, it enacted a rule requiring top executives to hold at least 25 percent of options-related shares for two years.
PENSION fund officials say the level should be higher, but Adobe maintains that its current policy strikes the right balance between shareholder and manager interests and that a higher level would prevent it from recruiting and retaining executives.
Two research groups financed by companies - the Conference Board and the Business Roundtable - have also announced their support for holding periods but have not been specific about rules they want. Some companies already require executives to hold stock worth several times their annual salary but place no other restrictions on the portion of shares they can sell.
The most likely source of change is boards themselves. They do not need a shareholder vote or new "best practices" rules to require executives to hold shares until the long-term effects of their plans become clear, shareholder advocates say.
"A lot of the executives today are not long-term players. They are not Warren Buffetts," said Senator Peter G. Fitzgerald, Republican of Illinois, who has pushed for a number of corporate governance changes. "The longer you get the managers to hold their stock, the better."
Mr. Fitzgerald recalled that his grandfather, Edward N. Gosselin, had received a stock option grant that represented about 10 percent of the Phoenix Manufacturing Company, based in Joliet, Ill., when he was recruited to run it in 1927. There was just one catch: "He had to be there 25 years to exercise it," the senator said. In the early 1950's, Mr. Gosselin did so, making a very nice profit. So did other shareholders who had held the stock all that time. |
