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When Executives Fail to Meet Company Stock Ownership Guidelines

Fulcrum Partners. Executive Benefits News

Although the economy has shown positive signs, (such as the May jobs report) indicating recovery is underway, no one is exhaling yet. Among the many issues that organizations are managing with prudence and often uncertainty, is how best to handle company stock ownership policies in the face of atypical stock price fluctuations.

In its May 29, 2020 update, “Should Stock Ownership Guidelines be Revisited in a Down Market?” the National Association of Stock Plan Professionals (NASPP) offered the following comments:

“…Given that downward movement in stock price can trigger a scenario where executives fail meeting their ownership guidelines, a policy exception may be warranted. My opinion is that the case for such an exception would be more tolerable for shareholders in a situation where the market as a whole is largely affected – like the scenario we are seeing with the impact of the COVID-19 pandemic.”

Attorney Mike Melbinger, Partner in the Winston & Strawn Chicago office and author of the Executive Compensation Blog, provides the following additional insight, shared below.

Stock Ownership Guidelines in Times of Market Volatility

“The precipitous drop in their stock price experienced by many companies created situations where officers and directors subject to stock ownership guidelines, with which they easily complied before COVID-19, suddenly fell below the required thresholds. In addition to all of the other problems and issues caused by the pandemic, the boards of directors at these companies had to consider whether to amend, suspend, extend, or ignore their stock ownership guidelines.

“Most companies seem to have chosen to consider the extraordinary circumstances triggered by the pandemic and adopt a lenient approach to enforcing their stock ownership guidelines. The precise language of stock ownership guidelines varies by company, of course, but most provide a period of time, often one year, for an officer or director who falls out of compliance with the guidelines (e.g., due to stock sale, stock price declines, etc.) to get back into compliance.

“Additionally, the enforcement provisions of most companies’ guidelines allow the compensation committee (or such other committee as is responsible for monitoring compliance with the guidelines) to take such actions as it deems appropriate, proving flexibility, rather than a fixed remedy, if an officer or director fails to comply with the guidelines.”

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