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Avoiding another Nacchio
The U.S. Supreme Court may review the Curious Case of Joe Nacchio this week, and I call it that not because Nacchio is aging backward, but because he is trying to make time move backward. Maybe then, I'm alluding to the wrong movie, but in any case, Nacchio's legal team argued last week he never should have been charged with insider trading or put on trial in the first place. They suggested, or at least hinted, that "material inside information" and countering public statements at the core of the conviction were nothing more than garden-variety chatter by a CEO looking to stoke his firm to a better performance.
The latest Nacchio Supreme Court brief was filed last week in anticipation that the high court could, maybe, possibly take a look at the case as early as Thursday (maybe). The quote from the brief that has been making the rounds of various publications reads: "If the predictions underlying this prosecution count as 'material inside information,' then no company or executive can buy or sell stock, ever, without risking capricious criminal prosecution."
I am not a Supreme Court judge, nor was I even close to being considered President Obama's alternate choice to Sonia Sotomayor, as far as I know, so I have no idea if the argument holds legal water or not. However, Nacchio and his team might have inadvertently suggested an interesting idea here about how CEOs should be compensated, and how freely they can manage their corporate stock. Perhaps it would be better in some ways if CEOs weren't expected to be personally responsible for so much of their company's stock as an exhibition of loyalty, faith and sense of purpose. Maybe it would be better if they were barred from buying, owning and selling their own company's stock altogether--at least until they retire or otherwise leave the company.
If that were the case, CEOs truly could come into companies as hired guns, getting paid on a salary basis, but having compensation packages back-loaded with bonuses that include even bigger stock awards than we traditionally have seen. But, rather than leave the selling and buying of stock to a CEO's whim, the stock award could go into a separate fund with an independent party assigned to manage it. The CEO's stock program could be managed as it would be by any astute cold-blooded investor.Taking the control of that stock from a CEO's hands could help avoid a similar case from happening again.
I'm sure someone will argue how dumb an idea this is, but at least it's a new idea. After former AT&T chief Edward Whitacre was named to lead General Motors last week, it occurred to me that corporate America is still more content to recycle old ideas rather than come up with fresh ones.
-Dan
For more:
Here's last week's Denver Post report on the Nacchio brief
More stories about Stockholders ceo pay Compensation Packages Corporate Stock Joe Nacchio Insider Trading
Comments
Posted by Anonymous | January 14, 2010 - 7:43pm
Let's keep this in its simplest form. The judicial system got this one right! Plainly said, HE CHEATED FOR PERSONAL GAIN like many other corporate ceo's. Maybe, just maybe, the court's decision may send a message to other Nachio's in this world. Respectively, one of the CLOWNS at a once proud RBOC.
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Posted by Stacey Wittig | August 3, 2009 - 9:43pm
I am only one of hundreds of employees who lost thousands of dollars in their QWEST retirement funds because of Nacchio's sell-off which tanked our stock prices. Many of those retired employees have had to go back to work, many have died and not ever re-couped their losses.
As a former employee who met and worked under Nacchio's rule, I would safely bet that the first comment posted here was written by his lawyers' PR agency. I have never heard a QWEST employee say anything positive about Mr. Nacchio who willingly sold massive portions of stock due to insider knowledge.
Is the US government serious about business ethics? Or are they going to continue to let these unethical CEOs go free? Joe should pay back to the employees and shareholders what he took away.
Posted by luingolden | July 1, 2009 - 2:20pm
Dan,
As an insider and former employee, I think that the Nacchio persecution (not prosecution) emanates from disgruntled investors who handsomely benefitted from Naccio's leadership style PRIOR to the telecom industry collapse in 2001.
The trials have never accurately addressed the right vs. wrong aspects of Nacchio's tenure or the real problems with Nacchio.
Instead, the prosecutors have, in 1930's era Mafia-prosecution-fashion, created the insider-trading allegations as the legal means and dominant theme of their witch-hunt.
The reality seems that the money investors risked and lost somehow requires retaliation by the losers on the executive. Instead, why not put a new tax on unexpected investor profits gained by these guys who want to jail executives for unexpected losses?
You know, there is an existing party responsible for avoiding unexpected losses -- the shareholder. Where's the lawsuit against shareholders for neglecting their responsibilities in this mess? The 2001 drop in the Qwest stock price may have been their punishment?
Posted by Anonymous | June 24, 2009 - 3:50pm
My question, admittedly naive, is how can we get leadership to stop managing to stock price and manage instead to overall company health?
I for one can't fault leadership for taking a quarterly viewpoint when the company owners have a daily or maybe a weekly one.
Posted by viperlmw | June 20, 2009 - 2:25pm
Dan:
I disagree totally with the previous comment. I think you have an excellent idea. It would remove the inherent conflict of interest and would force companies to better reveal CEO compensation to shareholders.
Posted by Anony | June 15, 2009 - 12:59pm
I think you have the facts of the Nacchio case wrong. He was convicted on the basis of acting for personal profit on material non-public information. His defenses range from persuasive to flimsy.
The part that is persuasive is that he undertook selling a portion of his stock because the time he had left to exercise his options was expiring and he wanted to diversify his financial holdings. That makes total sense. If 95% of someones net worth is in one particular they ought to diversify.
Your proposal would criminalize diversification. Which means any sane person who was a c-level would manage things as conservatively as possible and then leave at the first opportunity.
If the overall goal is good governance of shared stock corporations, this would promote the opposite. It deincents any risk taking and incents a continual revolving door of CEOs.
And it would prevent the use of stock options grants that has been a useful tool for companies- traditionally those have tied talent to a company.
See Professor Bainbridge's comments on criminalizing agency costs:
www,tcsdaily,com/article.aspx?id=042606A
Re Whiteacre: Why isnt it a new idea to have a Telecom exec run a government agency?
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