Formal Stock Ownership Policies On the Rise

Nearly half (49%) of the 250 companies polled disclosed formal ownership policies for executives, a 37% increase from 2001. Additionally, 32% said such a program was in place for their directors, a 46% increase from 2001. This trend is only expected to increase overthe next couple of years since investors are increasingly viewing the existence of stock ownership guidelines as evidence of good corporate governance, according to a Frederic W. Cook & Co., Inc. survey.

Traditional ownership guidelines are most prevalent among the respondents, with 77% of the companies having guidelines using this approach, which usually include multiple-of-salary/retainer and fixed share guidelines. However, retention approaches – guidelines that require the retention of a percentage of the “profit shares” from equity compensation programs –are increasing in prevalence, as evidenced by 48% of the companies that adopted guidelines during the past year using this approach.This compares to only 12% of the companies that had retention guidelines in place prior to 2002.

Additionally, 16% of those with guidelines incorporate a retention ratio. Sixty-five percent of the companies using retention ratio guidelines use a retention ratio in combination with traditional stock ownership guidelines.

Retention ratios apply before and after ownership guidelines are met at 55% of the companies that use a retention ratio in combination with traditional stock ownership guidelines. This design, as well as standalone retention ratios, support continuous accumulation of company stock throughout an executive’s career and mitigate the risk of inappropriate use of inside information, the study concluded.

With the implementation, the median value of required chief executive officer (CEO) ownership is approximately $5.1 million, with the most prevalent approach to director ownership guidelines is to require directors to hold company stock equal to a multiple of annual retainer. The median CEO multiple was found to be five times salary.

By comparison, 16% do not haveformal ownership guidelines for directors, but have structured their director compensation program in a way that eliminates the need for formal guidelines. Most common among these policies is to structure a portion of director compensation that is paid in deferred stock units that are not distributable until termination of board service or later.

A complete copy of the report can be found at http://www.fwcook.com/alert_letters/FWC_Stock_Ownership_09.03.pdf .