Executives who plunge into their company’s stock can reduce their net worth. This is particularly painful when bosses borrow against shares whose value then falls, as at troubled US exercise bike company Peloton.
When equity prices are strong, the move means executives get immediate cash, preserve their voting power and skirt capital gains taxes. Critics say the practice reduces the alignment of bosses with ordinary shareholders.
The loans are typically low-interest and banks are happy to lend to well-heeled clients whose equity is the collateral.
That is good for both sides — until stock prices collapse. Peloton, for example, has endured a share-price drop of more than 80 per cent since peaking in late 2020. According to a 2021 proxy statement, six different officers or directors of the company pledged a portion of their shares in order to raise personal cash.
There has been no disclosure so far to show that any executive has liquidated shares to meet margin calls, as has sometimes happened at other companies. However, the Financial Times has reported that some Peloton executives face having to do so. Given the downturn in equity markets, especially among tech and high-growth companies led by founders, mishaps are inevitable.
Longtime Peloton chief executive John Foley, who stepped down this month, has pledged nearly 70 per cent of the shares he owns outright, a hefty proportion. Critics of the practice say this kind of risk taken on by bosses can be distracting to their company.
Foley owns less than 2 per cent of Peloton. But where a CEO owns a high percentage of the shares outstanding, forced selling can exacerbate downward pressure on an already beleaguered business.
Perhaps the best-known pledger is Elon Musk, who according to Tesla’s 2021 proxy, owned 23 per cent of the company and had pledged more than one-third of his shares.
Stocks, of course, can rally. That would not only please shareholders but also banks. They would rather not foreclose on powerful CEO clients.
