INSIDER transactions are one of the most controversial and sensitive disclosures for companies to communicate to investors. How your company handles these disclosures can make a strong statement to investors about your company’s transparency.
The history of insider transaction disclosure on the Web illustrates companies’ sensitivity and reluctance to provide this information to investors. For years, regulators such as the U.S. Securities and Exchange Commission (SEC) tried to improve transparency around insider trading only to be blocked by heavy corporate lobbying.
Eventually, it took massive corporate scandals and collapses in 2001 for the tide to turn against the business lobby. Finally, the SEC introduced rules forcing all U.S. companies to provide access to their insider transaction filings on their corporate websites starting in June 2003.
The SEC also dramatically shortened the deadline for insiders to make their filings and made significant improvements to the EDGAR database to accommodate electronic insider reporting. Under the old rules executives had up to 41 days to file reports with the SEC. With the new rules, however, insiders have to file reports by the end of the second business day following the day on which the transaction is executed.
Significant geographic differences in insider disclosure
Regulators in several countries have followed the SEC’s lead, but with varying levels of effectiveness because most lack a central electronic repository like EDGAR. Consequently, insider transaction reporting is still poor everywhere outside of the U.S.
In countries where no electronic filing capability exists, companies face a major challenge to achieve parity with their U.S. counterparts. They may have to post each insider filing on their own websites manually.
Nevertheless, the effort is likely worthwhile if companies want to achieve credibility parity with their U.S. counterparts and attract investors who are conditioned to a higher level of disclosure transparency.
Furthermore, companies everywhere have an opportunity to use insider transaction disclosures to demonstrate higher levels of disclosure transparency because most companies’ existing practices are so poorly conceived that investors are unlikely to use or even notice them.
These guidelines go beyond the minimum standards for insider transaction disclosure to help companies build credibility online by demonstrating transparency and responsiveness to investors. Insider transaction information is a component of IR Web Report’s evaluation checklist, both as a core completeness attribute and as a component of the transparency dimension.
Show insider names and titles in transaction lists
Trades by senior executives and directors are potentially more significant to investors than those by lower-ranking executives. This is because those at the top of the corporate ladder, such as CEOs and CFOs, are presumed to have greater insight into all parts of the business, while business line managers may have only a partial view of what’s going on.
In light of this, investors are going to be most interested in insider transactions by the company’s most senior executives. They are not interested in routine transactions by lower-level managers. To spare investors the time of having to check the details of each and every insider trade, indicate the name and title of the reporting insider in your list of recent transactions.
The first screenshot shows the worst-case and most common scenario for insider information on IR websites today. This approach forces investors to view or download each filing to find out who is buying and selling the company’s securities. It creates a lot of unnecessary work and wasted time for investors.
This SEC filings page is poor because there is no way to tell which insider is making a filing without downloading the actual document.
The next screenshot is an improvement on the first example because it shows the name of the person who is reporting a transaction. If an investor knows the names of the main executives, they can quickly zero in on transactions of interest to them. Most people who monitor insider transactions closely probably know who is who at the company, but new investors likely need to see the person’s title as well.
Showing insiders' names in filings lists is more useful to investors because they can see who is behind a trade without having to download the individual filing. However, in this case they need to be familiar with who the company's key players are because job titles aren't given.
The next screenshot is about as good as it gets. It shows the most recent transactions, gives the name and title of the reporting person and provides summary details for each transaction including the number of securities involved. Investors can also click to view a history of transactions for each insider, which is very useful for prospective investors.
Allstate Corp.'s insider transaction information is first rate. Each entry shows a summary of the transaction, including the person's name and position, details of the transaction and the total number of shares held.
Show transactions for each insider
The default presentation for most insider transaction lists is to show them in reverse chronological order (most recent items at the top). This is appropriate in most circumstances, but occasionally investors will want to inspect the historical trading records of particular insiders, such as the CEO for CFO. If transaction lists are available only by date, investors will have to spend considerable time sorting through them to find all transactions by the CEO, for example.
That is why it’s important to give investors the ability to sort filings by insider or provide a separate list of filings for each insider. Ideally, each insider’s page should include a summary of key transaction statistics and a running tally of the the insider’s current holdings of each type of security. A list of transactions for the past 12 months is probably sufficient if there are a lot of reported transactions. If insiders at your company trade much less frequently, then you should show transactions for several years.
The screenshot below illustrates an example where investors can view a list of transactions for each insider from a drop-down menu. This is a very basic set up and investors have to download each filing in PDF to obtain details of the transactions. Nonetheless, it still saves investors a lot of time compared to sifting through a chronological list of all transactions by all insiders.
A simple drop-down menu allows investors to sort insider filings by insider.
In the next example, Oracle provides a list of insiders. The CEO is listed first and the rest of the insider list is alphabetical. Investors can then click on a name to go a page that provides access to all transactions by each insider in the past 12 months.
From this list investors can click on a name to view a list of transactions for the particular insider (below).
Transactions for each insider are shown on a separate page. A basic explanation for the transaction is provided, but investors have to view the Form 4 filing for more information. The "Form 4" links go to individual filings on the SEC's website. This chronology of the list is wrong. The most recent transactions should be at the top.
The next example, from Allstate, shows a transaction history page for the company’s chairman and CEO. Access to this page is from the transaction summary page we highlighted earlier. The best features on this page are the transaction details, including the number of shares traded and the running total of current holdings.
While very good, we don't like the disclaimer at the top of the page that suggests the information cannot be relied upon. There should also be links to the actual Form 4 filings so investors can verify the data.
The last example is from ABN AMRO, which is based in the Netherlands. (This page was no longer available in 2006, but it still is a good example.) The fact that the company removed this page and now no longer provides any insider transaction information will likely lead some investors to wonder what is going on. It’s important if you are going to provide something like this that you follow through with it.
ABN AMRO is one of the few European companies to provide prominent and clear details of insider transactions. In a table, it shows recent transactions for each insider including the value of transactions.
How to link to insider filings on EDGAR
U.S. companies have a distinct advantage over other companies when it comes to providing access to insider transaction information. This is because it is very easy to set up a usable filings page by linking to preset search results pages on the SEC’s EDGAR site rather than post filings on their own sites or rent insider modules from vendors.
However, there are a variety of approaches companies take when using EDGAR for insider disclosures, and these have varying degrees of usefulness. As a minimum standard, companies that rely on links to EDGAR should:
1. Provide a link to a list of the most recent filings for the company, and
2. Provide links to insider filings for individual insiders.
Setting up links to filings by individual insiders is easy because each reporting insider has a unique identifying code in the EDGAR system.
Morgan Stanley links to individual insider pages on the SEC's EDGAR site. Another approach is to link directly to individual filings from your site, but this requires more time to set up each link.
Filings list on EDGAR
Show transaction trends over time
While access to recent insider filings will alert investors to potentially important trades, individual transactions by themselves don’t give investors the benefit of seeing trades in the context of the company’s normal transaction and ownership patterns.
Without information on historical trends in aggregate, it’s impossible for investors to see if insider ownership is increasing or decreasing over time, or to determine if current trading is unusual in light of the pattern of the past.
Investors need to see a summary of insider transaction activities for the entire company over recent months, over a longer period of a year, and for each of the three prior years. The easiest to read summaries are presented in a table.
Few companies, just 1%, provide summaries, even though they are available from a variety of website vendors and don’t require manual updating. Companies that do provide them demonstrate a higher level of disclosure openness, which in turn can benefit investors’ perceptions of management’s credibility.
Summaries like this one from the Kellogg Company are rare on IR websites. They are valuable because they give investors insight into insider trading trends over time. This example could be improved by also providing total figures for the prior three calendar years so investors can see the recent 12-month period's figures in context.
Provide details of insiders’ current and past stakes in the company
Outline the requirements of any share ownership policy at the company for senior executives and directors. Such policies indicate to investors that insiders’ interests are aligned with those of shareholders.
When insiders have large ownership stakes, investors may interpret this as a sign of confidence in the company’s future. High levels of insider ownership should be communicated prominently on the company’s IR website to increase the likelihood of people seeing the information.
The level of detail in the information provided is important. Detailed information that includes amounts and values for individual insiders is better than aggregated information for insiders as a group. Ownership details should be updated regularly to reflect the most recent insider filings.
You should show each key insider’s current ownership of company securities as well as prior year figures.
Provide information about ownership requirements for directors and officers, as FPL Group does in its governance section.
Nokia provides current share ownership for directors and officers in monthly reports. These show the current shares held by each insider and the change during the month. Investors can link to details of executives' options (see below).
'
Nokia also provides monthly details of senior officers’ current options.
Explain your company’s policies for insider transactions
Companies should have policies governing how and when insiders can trade in their securities. These policies typically are detailed and aimed more at company insiders than investors.
Providing a summary of the policy’s key terms is more useful to most investors, but the full policy should also be provided so investors can evaluate its completeness if they want to.
Hormel publishes its insider trading guidelines on its IR website. Although this provides all of the details, investors can benefit from a concise summary of the key terms of the policy.
Nokia explains the company's insider trading policy in its short summary.
Explain the details of automatic trading plans
Insiders are typically restricted to trading their shares during trading windows when it is unlikely they will have knowledge of material nonpublic information about the company’s performance. However, these windows can place an undue burden on insiders’ ability to diversify and manage their finances.
Several jurisdictions allow insiders to set up automatic trading plans that allow them to buy or sell company securities within certain preset conditions at any time. In the United States, these plans are commonly referred to as Rule 10b5-1 trading programs.
Although many companies have such plans in place for insiders, most do a poor job explaining them to their investors. Common practice is to issue a news release announcing that the board will allow such plans and or announcing that a certain key insider, like the CEO, has established such a plan.
However, someone who does not follow the company closely or who is new to the company will easily miss these announcements. It is best, therefore, to provide a dedicated area on your site for information about preset trading plans and to explain the provisions of each insiders’ plan.
This will not only make your company look more transparent than others, but it also provides important context for investors to be able to understand why certain insiders may be selling or buying company stock.
Allstate is one of the few companies with a dedicated page detailing which insiders have 10-b plans. But it doesn't provide enough information about the terms of individual plans, except for the Chairman and CEO, which it does by linking to a news release.
Provide meaningful explanations for transactions
To get the most benefit from insider ownership and trading information, individual investors need to grasp the nuances inherent in the information. And to be able to do that, they need companies to provide explanations for transactions and to use language they can understand. If investors don’t interpret the information correctly, they probably will make poor decisions or reach inaccurate judgments based on faulty understanding.
The lexicon of insider transaction regulations also will likely be new to many individual investors and employee shareholders. They won’t be familiar with terms likes “Sections 16 filings“; “Form 3, 4, and 5“; “statements of beneficial ownership“; “10b5-1 plan“, and many others. It is better to user plainer terms like “insider transactions” or “automatic selling plan.” This is one area where a glossary would be a useful feature.
It is very helpful to provide context to explain why a particular insider conducted a trade. Keep the language simple, though. Individual investors, and even many professionals, won't know what a 10b5-1 plan is.
Email and RSS alerts an attractive feature
Email alerts and RSS feeds for insider filings are a real value-add for investors who follow insider information closely. Rather than have to manually check insider reports daily, the company pushes the information out to them when it makes a new filing.
Email alerts are available as part of the governance modules of website vendors like Thomson Financial and Shareholder.com.
However, new services utilizing RSS (really simple syndication) for SEC filings are likely to make these email alerts obsolete. RSS is an XML technology that allows investors to subscribe to a feed and receive information via an RSS aggregator, which is like an email program.
If you have access to a web developer, they can develop a customized RSS feed for you relatively easily from the SEC.gov site.
Other practices that can enhance your credibility
There are two additional credibility-building practices you might want to consider for your site. These are not essential, but they can enhance the experience of investors to your site and make insider transactions and holding information more visible to visitors. They are:
- Adding holdings information to director and executive biographies; and,
- Showing insider transactions on your stock chart, as illustrated in our guidelines for stock charts.
Electrolux provides share and options holdings (highlighted) in executives' and directors' bios. A link to additional information on holdings and compensation would add depth to the information.
Summary
Given companies’ historic resistance to disclosing it, insider transaction information has high credibility value on IR websites. There are wide geographic differences for insider disclosures, but even in the United States where disclosure is the norm, companies’ practices vary in their usefulness. Observe the following standards for insider transaction and ownership information:
- Indicate the name and title of insiders in filings lists.
- Allow investors to view filings for individual insiders.
- Show insider transaction trends over time.
- Provide information on each key insider’s current holdings.
- Explain the company’s policies for share ownership and trading, both in summary and in full.
- Explain the mechanics of automated trading plans.
- Use plain language and clear explanations for trades.
- Provide a way for investors to be alerted to new insider transactions through email and RSS.
- Increase the prominence of ownership and transaction information by including details in biographies and stock charts.
Recent Comments