Forbidding Corporate Executives From Selling Shares
July 18, 2002
Senator John McCain (R-Ariz.) and others want to forbid executives from selling company stock until they have left their jobs. Critics say that plan hasn't been thought out very well -- and would have all kinds of unintended consequences.
- Dedicated executives would not be able to diversify their personal portfolios.
- Managers who really did build value would need to move on to other companies after a few years in order to reap the rewards of their tenure -- turning corporate suites into musical chairs and the specialists who occupy them into business generalists.
- In exchange for assuming more financial risk, top managers would demand even higher salaries.
- Start-ups -- which often must use the lure of options in lieu of cash -- would see their founders departing early in order to cash out their equity.
Furthermore, successful founders would have to retire early to cash out their equity. There would be no more long careers like the ones that built Southwest Airlines, Intel, Federal Express or Microsoft -- just another of the many pitfalls of legislating in haste and repenting at leisure.
"Reforms" that ignore the role of incentives and competition will turn out to be monsters themselves, critics warn. Neither current nor future stockholders, nor a healthy marketplace, would be served by it.
Source: Virginia Postrel, "Economic Scene: Business 'Reforms' Should Not Ignore the Positive Roles of Incentives and Competition," New York Times, July 18, 2002.
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