Anger at Executives' Profits Fuels Support for Stock Curb
By DAVID LEONHARDT
estricting the ability of executives to sell company stock has quickly become a central part of efforts to change the rules under which corporate America does business.
In a step that would have been unthinkable in the long economic boom of the 1990's, an expanding array of big investors, policy makers and even a few business leaders are arguing that top executives should be required to keep much of their own company stock for as long as they hold their jobs. Proponents of the idea include Henry M. Paulson Jr., the chief executive of Goldman Sachs, and Senator John McCain, Republican of Arizona.
At the same time, officials at the Securities and Exchange Commission say they have become more aggressive about penalizing executives who appear to have profited from incorrect financial statements.
In response to mounting criticism, two lobbying groups representing leading businesses yesterday essentially dropped their opposition to a measure that would require companies to seek shareholder approval for new stock-option plans for top executives and their employees.
The efforts stem from the widespread anger over what many critics consider the most galling aspect of the recent corporate scandals: the contrast between the fortunes made by some executives while their stock was riding high and the ultimate fate of their companies.
Scott D. Sullivan, the chief financial officer of WorldCom who is now being investigated for accounting fraud, for example, made almost $10 million in profit when he sold nearly all his stock in the company two years ago. WorldCom's shares closed yesterday at 23 cents, down from about $37 when he made the sale. Some executives at Enron, Global Crossing, Rite Aid, Tyco International and Xerox — companies whose accounting practices have also been called into question — made far more money than that in recent years.
"You had highly promotional C.E.O.'s saying things were great yet selling just massive amounts of stock," said Kenneth F. Broad, a portfolio manager with Transamerica Investment Management in San Francisco. "It's virtually impossible to reconcile those two things."
The contrast has given the scandals a political potency that arcane accounting practices alone might not have and has helped create the first sustained challenge to executive pay since Bill Clinton made the issue part of his presidential campaign in 1992.
In the battle in Congress over corporate misconduct, lawmakers from both parties have submitted proposals dealing with executive pay, including some that would make it easier to fine executives at companies with accounting problems.
The S.E.C., meanwhile, has brought four cases this year that try to seize what it described as executives' ill-gotten gains. That matches the number of cases it brought in the previous 15 months.
"These are remedies that we will be more aggressive in seeking," Stephen M. Cutler, director of the commission's enforcement division, said in an interview last week.
The efforts to require holding periods for executives' stock remain scattered, but they have the potential to have a far broader effect than the attempts to punish executives after they have violated a law, major investors say.
Echoing calls from some institutional investors, Senator McCain said yesterday that executives should be required to hold onto their shares in a company as long as they work there. If they exercise stock options, the executives should be allowed to sell only enough shares to pay their income taxes, he said.
A spokeswoman for Senator McCain said he had not yet proposed legislation to establish such holding periods but would discuss them in detail in a speech on Thursday.
Such a rule would be difficult for the government to mandate, Congressional aides said, because it would prevent people from selling their own property.
But the idea is also gaining some momentum in the private sector. In a speech last month calling for changes in corporate practices, Mr. Paulson of Goldman Sachs said holding periods could level the playing field between investors and executives, who always have inside information about the company's health.
Boards should require their executives to hold "a substantial portion" of their stock, Mr. Paulson said. "This will create the proper incentives and inspire investor and employee confidence," he said.
A few companies, including Bank One and Citigroup, already have such policies. And most insiders at start-up companies are not allowed to sell their stock for certain minimum periods after an initial public offering of shares.
Supporters of imposing strict holding periods say they align an executive's pay with a company's performance. Executives' annual salaries and bonuses, which typically equal a few million dollars, are big enough to keep them comfortable, the investors say. Stock grants, they add, should make the executives lavishly wealthy only if their companies are successful over the long run.
The Conference Board, a business-backed research company in New York, has appointed a committee to recommend corporate-governance guidelines this year, and holding periods will be a main item on its agenda, said Richard E. Cavanagh, the president of the board. The committee includes John C. Bogle, the founder of the Vanguard Group, the large investment company; Andrew S. Grove, the chairman of Intel; and Paul A. Volcker, the former Federal Reserve chairman.
Holding periods "would make it impossible for an executive like the Tyco guy to get big gains and then a year later have a meltdown," Mr. Cavanagh said, referring to L. Dennis Kozlowski, the former chief executive of Tyco, who made more than $100 million selling his shares in the company before the stock collapsed.
But many executives oppose holding periods. Stock options — originally praised by investors, who saw them as a way to connect pay and performance — now represent the majority of the $10 million in annual pay that the chief executive of a typical large company receives.
At nearly every large technology company in the country, including Cisco Systems, Dell Computer and AOL Time Warner, executives would be far less wealthy if they had been unable to sell shares in the market bubble of the late 1990's.
Among the other proposals being debated in Washington, some of the best-known would not cause significant changes to the law, lawyers said. The S.E.C. said last month that it would require top executives to swear by their financial statements, for example. But to punish executives, the commission will still probably need to prove that they knowingly violated the law.
Both Democrats and Republicans have offered legislation that would give the S.E.C. specific authority to force executives to forfeit pay they received as a result of incorrect financial statements. But the commission effectively has such authority now, lawyers said.
"Much of what is going on here is symbolic," said John Olson, a lawyer at Gibson, Dunn & Crutcher in Washington who represents companies. "People want to appear to be doing the right thing by calling for new penalties."
But Mr. Olson and others said the measures could still lead to greater scrutiny for executives, at least in the short term, by concentrating regulators' attention on executives' behavior.
Recognizing the new atmosphere, two lobbying groups for executives announced yesterday that they would support a proposal from the New York Stock Exchange to require shareholders to approve all company stock-option plans. Analysts say the measure might cause boards to reduce the size of option grants so as to avoid a fight with investors.
One lobbying group, the Business Roundtable, a coalition of 150 chief executives, had long opposed such a rule, saying it would limit companies' flexibility. The Roundtable's members changed their position in an attempt to convince investors that their financial statements are trustworthy, said John J. Castellani, the group's president.
The other group, TechNet, which represents high-technology companies from Silicon Valley and elsewhere, had not taken a position on the proposal, but many of its members had strenuously criticized it.
Some investors said the business groups realized that the new stock-option rule would take effect no matter what and were supporting it now partly to bolster their opposition to the idea that companies should deduct the estimated cost of stock options from their earnings. Current accounting rules consider most options to have no cost.
Supporters of a change, including Alan Greenspan, the Fed chairman, say it would force companies to report more realistic profits than they now do. The executives say there is no credible way of valuing options.
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