Vice Chairman, Executive Pay & Governance
This Week in Leadership
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Picture this: you’re a director on the compensation committee of a company whose stock, for reasons unknown, has become the sudden target of a buying frenzy among day traders on social media, running up the share price to levels that would never normally happen. Your executives stand to make millions—even though the firm was struggling.
Welcome to the latest board headache. Directors are picking up the pieces from the sensational stock run-ups of certain companies, in which so-called rebel or armchair investors used social-media outlets to band against hedge funds and other institutional investors. In some cases, stock gains tripled in days, creating the potential for executives at some firms to gain anywhere from $100 million to $700 million.
Such gains—which have not been confirmed in any filing—go against the principle of rewarding executives for a job well done. In this latest frenzy, the armchair investors picked organizations that hedge funds were betting against, precisely because their corporate and stock performance had been poor.
Irv Becker, vice chairman of executive pay and governance at Korn Ferry, says compensation committees at the very least should be stress-testing their rewards and incentives programs to ensure proper guardrails are in place to prevent the inadvertent enriching of executives. “You can’t rule out that a concerted effort like this can happen again to your organization,” he says.
To be sure, aggressive investors using social media to band together to buy, sell, or short shares in a particular company’s stock happens every day. The last three decades have been filled with epic battles involving hedge funds or other big institutions making outsized bets on a company’s outlook. What’s different this time is that ordinary investors banded together for the express purpose of creating losses for the hedge funds that bet against those companies.
Experts point out there are no laws or regulations preventing leaders from selling stock to take advantage of the market’s exuberance, no matter how irrational it may be. But they also say that profiting on such a grand scale by leveraging a crowdsourced act of market manipulation doesn’t exactly jibe with the purpose-first movement and could alienate customers and employees.
Not everyone is concerned about such windfalls, though. Some argue that executives already have more curbs placed on their ability to trade company shares than investors and employees. If those stakeholders can profit from this kind of situation, then why not management? Far from being a problem, David Yermack, chairman of the finance department at NYU’s Stern School of Business, says permitting executives to cash out an overvalued share price may cause the stock to drop, thus better reflecting its true worth. “Boards should be pleased when this occurs,” he says, noting that the stock price drop comes less at the expense of the company and more at those who attempted to manipulate the price higher.
Becker advises compensation committees to examine the protocols they have in place governing when and how executives can exercise options or sell shares. In addition to the regulatory disclosures on insider trades, he suggests they review blackout periods, vesting schedules, holding periods, and other ownership guidelines and amend them as necessary. He also says boards could put plans in place allowing for “ad hoc” prohibition of certain executives’ trades if an unnatural market run-up such as last month’s breaks out.
Despite the temptation to cash in, Wayne Guay, an accounting professor at the Wharton School who specializes in executive compensation issues, says he would be surprised if an executive took advantage of the frenzy. SEC filings, in fact, show no insider trades among executives of the companies targeted by the rebel investors so far. Guay says the episode was symbolic of a larger sense of discontent with the capital markets among a segment of the population. “They’ve chosen to express their unhappiness by targeting companies they are fond of that need support, and it is unlikely executives would choose to alienate these investors further by enriching themselves,” he says. But, he is quick to add, “we’ll see what happens.”