The John M. Olin Center

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49. Nitzan Shilon, Stock Ownership Policies- Rhetoric and Reality, 02/2013.

Abstract: In the aftermath of the 2008-2009 financial crisis, shareholders have pressed U.S. firms to adopt Stock Ownership Policies ("SOPs"), which require senior executives and directors to hold a certain dollar value of their firms' stock for the long-term. Firms have universally responded by adopting these policies and citing them as a key tool in their mitigation of risk. On the basis of a study of the 2010 SOPs as applied to CEOs in S&P 500 firms, I conclude that current SOPs are extremely ineffective, as they typically allow CEOs to unload virtually all of their vested stock. Moreover, SOP ineffectiveness is camouflaged in firms' public filings. The finding that current SOPs are both extremely ineffective and camouflaged is troubling because it shows that firms can hide the incentives that managers may still have to take inappropriate risks and to run their firms for the short-term. The lack of transparency further prevents investors, firms, public officials and governance reformers from conducting an informed dialogue on how SOPs should be designed. To remedy this flaw, I propose a regulatory reform to make SOPs transparent.