Tuesday, June 28, 2005
General Motors changed its policy in April when it stopped giving earnings guidance, no doubt because all the bad news of the past year meant its financial executives had to conduct conference calls while wearing flak jackets. When a company does not try to guide estimates of its quarterly and annual earnings, there is a greater likelihood that disclosure of financial information will move the market one way or the other (mostly down recently for GM, but that could change). In an apparent effort to avert any temptation for its executives to trade on financial information before its disclosure, the company issued a prohibition to all executives with access to sensitive financial information from all trading in GM stock, at least for the time being. It is unlikely the company will adopt a permanent ban on trading by its executives because stock awards are an important component of compensation at most publicly traded companies. GM may direct its executives toward a program of pre-planned sales through a written plan for securities transactions, which is permissible to avoid liability for insider trading under SEC Rule 10b-5-1(c) (here).
Given the gyrations in the company's stock, the threat posed by investor Kirk Kerkorian, who is now the largest individual shareholder in the company, and the need to renegotiate its retiree health care costs, the last thing GM needs to see is an allegation of insider trading by one of its executives. While the prohibition against insider trading is well-known, there is always a temptation to pick up a little "free money" that GM may be acknowledging as management tries to turn the company around. Of course, a cynic might argue that the restriction is really meant to keep executives from dumping shares after the recent run-up in the stock price, but I'm hardly a cynic. A Detroit News article (here) discusses the restrictions on trading imposed by the company. (ph)