February 13, 2020

Insider Trading: Should Your Policy Cover More Than Legal Risks?

A recent paper from Stanford’s Rock Center notes that while most insider trading policies are designed to prevent violations of law, companies need to ask whether their existing insider trading policies need to cover more ground in order to be consistent with good governance practices. Here’s an excerpt:

Despite procedures designed to ensure compliance with applicable rules, news media and the public tend to be suspicious of large-scale executive stock sales.7 This is particularly the case when a sale occurs prior to significant negative news that drives down the stock price.

Public suspicion is exacerbated by inconsistent and nontransparent corporate practices—such as, lack of communication around why the sale was made, whether the general counsel approved the trade in advance, and whether the trade was the result of a 10b5-1 plan—and differing opinions about what constitutes “material” nonpublic information. Thus, an executive stock sale might pass the legal test but fail the “smell test” employed by the general public. A well-designed ITP lessens the likelihood of such a scenario.

The paper reviews 4 real-life vignettes involving insider transactions that, if not illegal, sure didn’t look very good. It raises a number of governance issues, like why companies don’t always make their insider trading policies public, mandate the use of 10b5-1 plans by senior execs or require pre-approval of all trades by the general counsel?

Shareholder Proposals: Be Careful What You Wish For?

Carl Hagberg, who has probably forgotten more about the proxy voting and annual meeting process than most of us will ever know, recently submitted a comment letter on the SEC’s proposed changes to Rule 14a-8. In addition to some colorful language about the release itself – which he calls “ponderously long, dense and maddeningly-meandering” – he contends that the current system is working reasonably well. He also claims that the proposals don’t address the ability of shareholders to use “proxies” to make proposals on their behalf, which he views as the biggest problem under the current regime.

Your mileage may vary when it comes to Carl’s arguments, but you should definitely read his letter because he knows a lot about this stuff & his letter’s kind of fun. But regardless of whether you agree with his arguments, he raises a good point about the potential unintended consequences of the proposed changes:

My most important takeaway, however, from a “common sense perspective,” is to note yet another tried and true old-saw: “Beware of what you wish for.” I guarantee that higher hurdles, if enacted, will result in institutional investors casting way more Yes-Votes for shareholder proposals than they otherwise would – simply to give proponents a decent shot at a three-year trial-run in the polls.

Quick Poll: Your Take on The 14a-8 Proposals

Carl recognizes that not everybody will agree with his take, so he suggested that we take a poll of our readers.  My response was “Why not?” And so, because polls are an easy third blog, here we go – please take part in this anonymous poll.

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John Jenkins