Insiders sold $42.3 billion in stock in 1999, up 12 percent from 1998, according to an insider- trading research firm. CFOs certainly cashed in, but they usually had to do so while walking on eggshells.
The officers of Microsoft Corp. accounted for a whopping 10 percent of the total insider sales of all firms, according to figures from Washington Service and First Call, two insider research firms. Top CFO sellers included Jeffrey Henley, CFO of Oracle Corp. ($77 million); Tom Meredith, CFO of Dell Computer Corp. ($37.4 million); and Richard Stoltz, CFO of Exodus Communications Inc. ($34.2 million). But those sales were a drop in the bucket compared with those of top-selling CEOs and directors (see chart, below).
Many CFOs may be holding back, however. As the one with the finger on the financial pulse of a company, a CFO who sells stock can send a signal of troubled times ahead. Every move is scrutinized. For instance, when American Home Products CFO Robert Blount, among several executives, cashed out millions amid a flurry of regulatory setbacks and product lawsuits, analysts and the press cried foul. Lawsuits can be quick to follow, which happened when Oracle executives, including CFO Henley, sold shares six months before a revenue-growth warning in December 1997.
The less-senior executives are also under the microscope. "CEOs and the chairmen of most companies know people are watching them. When we see large trades by these people, we tend not to read a lot of significance into them," says Bob Gabele, editor of First Call/Thomson Financial's Insiders' Chronicle newsletter. "We watch the trades of the less-senior insiders a lot closer. They will make moves to protect their net worth."
The Securities and Exchange Commission has strict insider- trading rules that also apply to less-senior executives. Nonetheless, CFOs must cope with the public-perception problems associated with insider sales. Many companies have strict voluntary insider-sales "black-out periods," usually around earnings releases. William M. Steul, CFO of Eaton Vance Corp., an investment management firm in Boston, requires all employees, not just finance executives, to get permission from him before cashing in stock; he has had to say no on occasion.
Some CFOs think the best way to avoid the problem is to observe a buy-and-hold policy. David Southwell, executive vice president and CFO of Sepracor Inc., a pharmaceuticals company in Marlboro, Mass., follows this policy as closely as he can. "A financial adviser would tell you that you shouldn't hold stock in the company you work for," says Southwell. "But stockholders want me to be up to the gills in company stock. So I have sold very little stock, but it's for one reason: it's a great investment. If you reach the conclusion that [your company's stock] is not a good investment and decide to sell, you should get a job somewhere else."
Dell's Meredith disagrees. He feels that the decision to sell stock is personal and can't be subject to one-size- fits-all rules. Even though Meredith sold more than $37 million in stock last year, he says he was a year-over-year "net adder" of Dell stock to his holdings.
"Every individual has a unique and personal situation. To assert that there should be a macro law to buy and hold is, frankly, foolish," he says.
Meredith concedes, however, that if a company is facing hard times, the need to project confidence in the company may take precedence over the desire to maximize personal investment. "Given certain situations, the CFO should hold," he says, "to show [he] has every faith that the company can come back."
There are ways to deflect scrutiny. CFOs can participate in equity swaps and exchange funds, in which a company executive combines his or her stock with that of senior executives from other companies, each holding a percentage of the fund. Kris Frieswick