Governance of Corporate Insider Equity Trades

Governance of Corporate Insider Equity Trades

By
John D. Kepler, David F. Larcker, Brian Tayan, Daniel J. Taylor
Stanford Closer Look Series. January
2020

Corporate executives receive a considerable portion of their compensation in the form of equity and, from time to time, sell a portion of their holdings in the open market. Executives nearly always have access to nonpublic information about the company, and routinely have an information advantage over public shareholders. Federal securities laws prohibit executives from trading on material nonpublic information about their company, and companies develop an Insider Trading Policy to ensure executives comply with applicable rules. In this Closer Look, we examine the potential shortcomings of existing governance practices as illustrated by four examples that suggest significant room for improvement.

We ask: 

  • Should an ITP go beyond legal requirements to minimize the risk of negative public perception from trades that might otherwise appear suspicious?
  • Why don’t all companies make the terms of their ITP public?
  • Why don’t more companies require the strictest standards, such as pre-approval by the general counsel and mandatory use of 10b5-1 plans?
  • Does the board review trades by insiders on a regular basis? What conversation, if any, takes place between executives and the board around large, single-event sales?