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New Tool to Address Executives’ Concentrated Stock Position Problems?

January 2, 2019

Thanks to our friend Michael Melbinger

Some public company executives have a problem. The company imposes stock ownership guidelines on them, which become stricter over time pursuant to the demands of investors and proxy advisors. Some companies have added post-vest holding period requirements, which require the executive to hold company stock received under equity awards for an additional period (generally, two years) after the award has vested, or even so-called “hold ‘til retirement” provisions. And of course, nearly all companies prohibit executives from hedging (or even pledging) their company stock position.
Don’t get me wrong, I understand and agree with the concept that senior executives (and directors) ought to be heavily invested in the companies they lead in order to ensure a laser-like focus on performance. However, any first-year business student or financial planner could tell you that diversification is critical to financial security. Putting all of your eggs in one basket is never a good idea, and this is especially true approaching retirement age. Additionally, requiring all executives to hold the majority of their wealth in a single asset may encourage executives to become risk averse in a manner that is contrary to the stockholders’ interests.
I recently spotted a blog post Retirement Dreams Up in Flames from a company named StockShield LLC describing an interesting idea. StockShield establishes and maintains a “Stock Protection Trust,” designed to limit the downside risk of company stock holdings while preserving their full upside potential. As I understand it, a diverse group of investors (each with a different stock in a different industry) combine together to pool cash (not their stocks) into the Stock Protection Trust. At the end of a 5-year period, the cash is used to either eliminate or substantially reduce declines in stock value over that time. The strategy is intended to be neither a sale nor a hedging of the stock (one definition of hedging I found is “eliminating the risk of loss by giving up the potential for gain”). And no transfer would be made for purposes of Form 4
So my thought is that if we are to continue to ask – or demand – that our intelligent and accomplished business leaders ignore this fundamental investment principle, their company should at least allow them to mitigate the risk that their entire net worth will be decimated, often for reasons completely outside their control. And unlike selling the stock, this strategy is intended to create no downward pressure on the shares.
I am still looking into this strategy, but would love to hear from readers who may have an opinion. (StockShield also establishes Deferred Compensation Protection Trusts, which could be used by participants to protect their non-qualified retirement savings. Participants in these trusts hold NQDC balances in similar-risk companies (e.g. all companies have credit ratings of “A” or higher, for example, or another trust could have only “BBB” companies).)
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