Council of Institutional Investors

Statement on Stock Sales by Insiders

Public confidence that securities markets are fair to all participants serves the interests of both companies and investors. When executives, officers and directors (“insiders”) sell company stock before important information reaches the public, that confidence erodes.

This erosion of confidence can happen without any violation of federal securities laws taking place. One such example is “selling into buybacks,” whereby insiders reduce their equity holdings shortly after the announcement of a company stock repurchase program. The actual amount and timing of buybacks—though eventually determined by insiders—becomes known to the public subsequent to the insiders’ sale of stock.  Another scenario that harms public confidence involves insiders aggressively promoting the company’s long-term prospects to public investors during the six months before and after a company’s initial public offering or direct listing, while simultaneously reducing their personal stake.
In the interest of optimizing long-term alignment with shareowners and reducing the risk of confidence-eroding stock sales, boards should consider requiring companies’ highest-level executives (at least the CEO and CFO) as well as non-employee directors to hold all company stock they receive until after their departure from the company.  For insiders for whom the board believes such an expectation is unworkable, CII recommends that boards adopt a policy requiring that insider stock sales take place either through a robust automatic trading plan governed by Rule 10b5-1 or through processes and controls, approved by an appropriate board committee, that mimic the rules and features of such a plan.
For Rule 10b5-1 plans to fulfill their legitimate purpose, they should be: publicly disclosed; adopted when the participant is not in possession of material, non-public information; inactive for at least three months following adoption; and ineligible for substantive modification. Participants should not be party to concurrently active 10b5-1 plans, and companies should avoid frequently cancelling and adopting new plans. Boards should periodically monitor plan transactions and adopt written policies covering plan practices, including how plans may be used in the context of guidelines or requirements on equity hedging, holding and ownership; and suspend trading under such plans upon internal awareness of an M&A transaction or tender offer involving the company.
Insiders should not reap rewards for announcing stock buyback programs, but their equity stake should benefit (or suffer) by the extent to which actual company repurchases prove to be wise (or imprudent) long-term capital allocation decisions. Announcing a share repurchase program has no impact on a company’s overall profitability. Nor does it define the number of shares that will ultimately be repurchased, which history shows is often substantially below the number of shares authorized under the announcement.
Aside from undermining the motivation for stock-based compensation, the phenomenon of insiders decreasing their equity holdings while a company actively repurchases shares sends an inconsistent message to investors. While valid circumstances may justify some amount of inconsistency, CII encourages boards to closely monitor for this concern, so that consistent signaling broadly predominates between the company’s repurchase activity and insiders’ trading activity. Both to improve market efficiency and reduce the likelihood of abuses, companies should disclose share repurchases at a frequency and level of detail on par with their disclosure of insider stock sales.

Background & Intent
When overhauling CII’s executive compensation policy in 2018 and 2019, the Policies Committee determined that that policy’s section on stock sales (Section 5.15b) warranted separate re-consideration and a standalone statement. The creation of this statement provides an opportunity to support closing loopholes in 10b5-1 plans, on which CII has a long advocacy record, raise particular circumstances in which insider stock sales are problematic, and support improvement with regard to transparency of company stock repurchases.
CII believes that companies should have discretion to make capital allocation decisions that they believe will best serve long-term company performance, subject to accountability to shareholders. At the same time, management’s ability to exercise clear-eyed judgment about the best use of capital can be compromised when, through a combination of circumstances, any particular allocation alternative offers the potential to deliver special benefits to insiders relative to other capital allocation alternatives.
A short-term market reaction to a buyback program announcement has no linkage to the intent of stock-based compensation, yet many companies have programs and policies enabling insiders to sell stock shortly after the announcement of a buyback program authorization. In order for stock-based compensation to reflect the impact of actual repurchases and the wisdom of that capital allocation decision, insiders need to hold stock long after such announcements.
In seeking to remove insiders’ ability to influence the timing of stock sales, the adoption of Rule 10b5-1 in 2000 created a path for insiders in possession of material, non-pubic information to sell stock through automatic trading plans, without fear of prosecution under federal insider trading rules. 10b5-1 plans need to be strengthened to eliminate the insider influence they intended to remove. Currently these plans are not transparent. Existing plans can be revised, or they can be terminated and replaced with newer plans with different terms. Participants can have multiple, overlapping plans, and initial participation does not require a meaningful waiting period, enabling opportunistically-timed selling.

Adopted March 10, 2020