Capital Markets

Sharing The Downside

Why, on the whole, CFOs should buy more of their companies' stocks.
Alix StuartMarch 3, 2008

When James Lawrence left General Mills to become CFO of Unilever last September, investors hoped he would help boost the Anglo-Dutch consumer-products firm’s lagging stock price. What they probably didn’t expect was that he would use his own money to do so. In two transactions spanning four months, the 55-year-old executive bought about $20m (€13.6m) of Unilever stock on the open market, giving the share price a 7% pop in the days following the announcement of the purchases.

Few of Lawrence’s peers are following suit. In 2007, CFOs in the US, for example, bought $108.4m of stock in their firms, a pittance compared with the $565.4m that they sold, according to SEC filings analysed by That doesn’t even include sales following options exercises, which add another $1.8 billion to the sales total. “Certainly CFOs face some restraints on when they can trade, but judging by the number of sells, they’re obviously not that constrained,” says Ben Silverman, research director at

More companies are waking up to the reality that investors expect executives to take downside risk — that is, suffer along with shareholders when the stock drops — while formalising policies about the amount of stock they expect executives to hold, as research from consulting firm Frederic W Cook has found. The theory is that executives will work harder to preserve value in something they own, rather than something they merely could own through stock options. This is supported by a wealth of evidence that stock performance improves as executives increase shareholdings in the companies they run. According to an analysis by Watson Wyatt Worldwide, companies whose CFOs hold more shares generally showed higher stock returns and better operating performance. “Ownership makes people more prudent; they think harder about things like acquisitions, and how often to fly first-class,” says Ira Kay, global practice director of executive compensation consulting at Watson Wyatt.

For the 110 large companies Watson Wyatt studied, for example, the high-performing half of the stocks returned an average of 52% to shareholders between 2003 and 2006, including stock-price gains and dividends, compared with 39% the low-performing half returned. Among other differences between the two was CFO stock ownership: a median $13.9m (excluding both vested and unvested stock options) for the top performers, only $2.8m for the low performers. Kay is convinced the correlation is not coincidental. He has found similar evidence using a larger sample of companies and CEO data over a timeframe of ten years.