When a board gets to the point where it feels it needs to have a widespread automatic stock sales program, maybe it’s a sign that it’s giving out way too many stock options to insiders
I’ve been receiving a number of calls from the press regarding Research In Motion’s new automatic stock selling plan for insiders. RIM has a problem, it seems, in managing its abundance of insider wealth. With so many directors and officers having so much stock –much of it gained by an extraordinarily generous stock option plan that saw millions of shares awarded through option grants– it has had to set up a program to sell insiders’ shares in a way that avoids any hint of impropriety. RIM is still recovering from the backdating scandal that involved the company’s co-CEOs, the CFO and a number of directors. For several months in late in 2006 and into 2007, insider stock trades were frozen because the company could not produce accurate financial statements due to option-related accounting problems. During that period, co-CEOs Jim Balsillie and Michael Lazaridis exercised more than 750,000 options between them alone. And that was just a fraction of their total awards. We’ve had some thoughts on RIM’s accounting/backdating fiasco on a number of occasions. This latest move, which will see nearly $400 million worth of stock sold over the next 12 to 18 months, is no doubt also intended to help shore up RIM’s image with the SEC, which apparently is still investigating the backdating episodes. Finlay ON Governance was the first to raise the issue of RIM’s noticeably deficient corporate governance practices that were also implicated in the backdating scandal. The company has since scrambled to repair some of its board practices, as well.
You may recall at the time the company produced the report on its internal investigation (which we thought might as well have been written on Swiss cheese because of all the holes it contained in the form of unanswered questions), Mr. Balsillie, RIM’s co-founder, who, as his company’s bio boasts, holds the Canadian chartered accounting profession’s highest certification, and Dennis Kavelman, RIM’s former CFO, who is also a professional accountant by training, both claimed not to know that undisclosed backdating was a no-no under accounting rules. RIM’s board, some of whose members also received backdated options, did not keep complete records of stock option decisions and transactions, according to the internal report. They never explained who approved the backdating for directors.
As a rule, investors like to see management and directors buying stock, not selling it. This is especially the case in a company where most of the top people are still under 50 and aren’t planning to leave anytime soon. Insiders selling significant blocks of their company’s stock en masse is not something the market sees very often and is seldom prepared to overlook.
Here is an excerpt from what I told today’s Financial Post:
I am never a fan of companies where there is a lot of insider stock selling. They are the leaders. Would they like other stockholders to sell too? The market is entitled to view mass selling by insiders as an indication of a lack of confidence in the future, since, if the price of the stock is expected to rise, a rational investor –even an insider– would not want to sell.
The fact that the plan is being unveiled at a time when RIM’s shares stand at record levels might prompt some prudent investors to wonder if the company’s insiders have a less than bullish vision of the future. Maybe RIM’s shareholders should begin to contemplate their own systematic sale of shares.
One final thought for investors to ponder: When a board gets to the point where it feels it needs to have a widespread automatic stock sales program, maybe it’s a sign that it’s giving out way too many stock options to insiders.