by Cydney Posner
The consulting firm Equilar has recently issued a Report on its study of trends in the design and prevalence of director stock ownership guidelines among Fortune 100 companies. The study looked at the fiscal years 2012, 2013 and 2014. Stock ownership guidelines typically require directors to own at least a specified number of company shares and may also require that directors hold equity granted as compensation for a minimum period before sale. Guidelines are designed to ensure that board members are invested in the company’s current and future performance and, in recent years, investors have clamored for the adoption of guidelines. Although the study reports on the Fortune 100, these governance trends typically filter to broader groups over time, although perhaps in modified form.
According to the Report, over the three-year period, almost 90% of the Fortune 100 have publicly disclosed director stock ownership guidelines. In addition, the number of companies that also include holding requirements has increased over the three years “from 25.5% to 30.9%, while the percentage of companies that implement only ownership guidelines for directors fell to 49.5%, a decrease from 56.4% two years prior. Just 6.2% of companies had holding requirements only.” In 2014, almost 90% of the companies that had guidelines also had “accumulation periods” (during which the director could accumulate the required number of shares) ranging from one to 10 years, with 84.3% set at five years after appointment.
Ownership Requirements. Typically, the level of stock ownership required is calculated either as a fixed dollar value, a fixed number of shares or, most commonly, a multiple of the annual retainer. In 2014, the percentage of companies using a multiple of the annual retainer was over 60%, and, among those companies, 60% required directors to hold shares with a value five times their annual retainers, while 24% used a multiple of three. In the same year, the percentage of companies using a fixed number of shares was 11.5% and the percentage using a fixed dollar value was 10.3% .
With respect to target ownership amounts, the median values have all increased over the past three years from $400,000 in 2012 to $500,000 in 2014, regardless of whether the value is determined as a retainer multiple, number of shares or value of shares. However, target values in programs based on ownership of specific numbers of shares were the highest and had the steepest increase over the period, rising from a target amount of $353,690 in 2012 to a target of $550,480 in 2014. A consultant commenting in the report observed that, when markets are sinking, there is a risk that the directors will fall out of compliance: “This issue is as important now as ever as companies are looking to bring in more viewpoints. Aggressive director ownership guidelines could be a burden for new directors or candidates that are not independently wealthy.”
Holding Requirements. To reinforce a long-term focus, many companies have implementing holding requirements — with or without stock ownership requirements — beyond the typical equity vesting provisions. These holding requirements preclude share transfers until either a specified period of time has elapsed or the ownership guidelines have been met. Overall, the Report indicates, in 2014, 37.1% of the companies in the study had some form of holding requirements. Holding requirements are often structured to require the director to hold a specified amount of company stock that was acquired through exercised or vested stock awards either before or after they satisfy the ownership guidelines. According to the Report, 77.8% of companies in the study used either pre-guideline holding requirements or general holding requirements, while only 2.8% had both pre- and post-holding requirements in 2014. One of the commentators observed in the Report that, as director pay programs move toward a greater emphasis on full value shares and shorter vesting periods, “ownership guidelines and holding requirements take on additional weight…[e]nsuring a longer-term alignment and focus…”