Headline News

A Board Struggles with Its CEO’s Borrowing


This article appeared in The Wall Street Journal, Jan. 28, 2016. 

A stock slump last year squeezed trucking executive Jerry Moyes, who had borrowed heavily against his shares in the company he founded.

The chief executive of Swift Transportation Co., one of the largest trucking firms in the U.S., not only faced demands for more loan collateral but ran up against company limits on the extent of his borrowing.

Three times, Swift’s board stepped in to give the CEO more time to deal with his margin loans. Mr. Moyes also got some potential relief via a stronger share price as the board approved a stock buyback plan, Swift’s first since going public six years ago.

Now Mr. Moyes is calling for an even larger buyback, in one of a chain of events at the trucking firm that shows the complications a board can face as it grapples with how much to let top executives borrow against their stakes in the company they run.

Mr. Moyes has pledged more than $600 million of his holdings in Swift—a quarter of the outstanding shares—as collateral for loans or in complex loan-like contracts, according to securities filings. The trucking company’s stock tumbled 52% in 2015. The fall triggered margin calls—demands to make up shortfalls in the value of collateral—which Mr. Moyes sometimes dealt with by pledging more Swift shares.

His use of his Swift stock as margin-loan collateral has exceeded limits set by the board, regulatory filings show. As those limits gradually kicked in, directors gave Mr. Moyes additional time to meet them, which could be done by moves such as reducing his personal debts or using collateral other than Swift shares.

In November and January, Swift spent $100 million on share repurchases. Then on Tuesday, a day after Swift disclosed earnings, Mr. Moyes said he wanted the company to spend $200 million more buying back shares. Swift’s stock surged 22%.

At current prices, a buyback of that size would retire about 9% of the stock, supporting its price and easing pressure on Mr. Moyes’s margin loans. Despite Tuesday’s price jump, Swift’s stock remains down by 40% from a year ago. Swift officials say the buyback plan is unrelated to Mr. Moyes’s stock pledges.

Not the only one
Swift isn’t the only company whose executives have struggled with loans against their shares after price drops cut their collateral’s value. During the late-2008 market meltdown, Sumner Redstone, executive chairman of Viacom Inc. and CBS Corp., sold 20% of his stake in the companies to satisfy debts. Aubrey McClendon, founder and former CEO of Chesapeake Energy Corp., was forced to unload 94% of his stake. Last year, Valeant Pharmaceuticals International Inc. CEO J. Michael Pearson had to sell about $100 million of his shares in the company as its once-soaring shares slumped.

Though corporations may permit executives and directors to borrow against company shares they own, many limit or ban the practice. Such borrowing is unpopular among some institutional investors, who say it can undermine the long-term incentive of stock ownership by generating quick cash, and can insulate executives from poor company performance. Also, if the stock price falls, holders of pledged shares could be forced to sell rapidly, hurting the price even more.

Institutional Shareholder Services, the proxy-advisory firm, has objected to the Swift board’s willingness to let top executives pledge shares they own. “The directors, in a certain sense, they do have an obligation to implement an unwinding strategy that is not going to be detrimental to shareholders,” said Carol Bowie, ISS’s head of Americas research. “On the other hand, this has been going on for a while, and investors do have a legitimate question here about what took them so long.”

Mr. Moyes, who owns a controlling stake in the company he founded 50 years ago, declined to comment. Swift said the CEO has been working under the board’s leadership to reduce his shares pledged for margin loans. “In bringing about this reduction, the Board and Mr. Moyes are mindful of the need to ensure that any reduction occur in an orderly fashion,” a written company statement said.

Richard Dozer, Swift’s chairman, added that “the $100 million share repurchase plan that we, as a Board of Directors, authorized in September of 2015 had absolutely nothing to do with Mr. Moyes stock pledging, or margin calls.” A company spokesman said several large shareholders had urged Swift last summer to consider share repurchases.

Swift’s board is unusually small, just six members. To analysts of corporate governance, board size matters: While too-large boards can be unwieldy, too-small boards can turn into echo chambers and foster an eagerness among directors to get along in the face of tough decisions.

The Phoenix-based company has just four independent directors, as defined by New York Stock Exchange rules, Swift’s securities filings say. And one of those deemed independent, Mr. Dozer, spent years helping run a business that was partly owned by Mr. Moyes, the Arizona Diamondbacks. Mr. Dozer was the baseball team’s president from 1995 until 2006, and Mr. Moyes was a minority owner from 1996 until last year.

Mr. Dozer said the board has been “working in concert to reduce the number of shares Jerry has pledged on margin loans.” Swift’s regulatory filings “adequately explain the transactions and timelines,” he said.

Another independent director, Glenn Brown, said, “All the decisions that the board makes are in the best interests of the shareholders.”

The son of a trucker, Mr. Moyes, 71 years old, is a pioneer of the modern trucking business. He built Swift from a single truck in Phoenix into a coast-to-coast giant with 18,000 trucks and $4 billion in annual revenue.

Mr. Moyes resigned as CEO in 2005 after a settlement with the Securities and Exchange Commission of civil insider-trading allegations, in which he didn’t admit any wrongdoing. Two years later, he took Swift private in a $2.6 billion leveraged buyout.

Mr. Moyes has often used his stake in Swift—which he took public again in 2010—to help fund other pursuits, analysts say. “Jerry’s always got a bunch of money collateralized,” said Art Hatfield, an analyst at brokerage firm Raymond James. “Ever since he’s been involved with the company, he’s pledged his stock. He’s got so many different business interests going on that he’s always used Swift stocks as collateral against loans to his other ventures.”

In addition to Swift and the Diamondbacks, Mr. Moyes’s ventures in the Phoenix area have included a charter airline, a steel fabricator and a marina that offers boat tours of Lake Powell. He was a minority owner of the Phoenix Suns basketball team and was majority owner of the NHL’s Phoenix Coyotes, in a group that included hockey great Wayne Gretzky, before the team filed for bankruptcy and was sold back to the league in 2009.

Mr. Moyes and his family owned 60.3 million Swift shares as of Oct. 31 and had pledged at least 37 million of them either as margin-loan collateral or in loan-like arrangements, according to regulatory filings.

When Swift went public for the second time, it had a policy barring directors and senior officers from pledging more than 20% of their family holdings in Swift stock for margin loans.

In 2013, the board revised the limits, lowering the cap to 15% as of July 2014 and to 10% as of July 2015.

In June 2015, Mr. Moyes told Swift’s chairman he was trying to reduce the amount of his pledged shares to meet the 10% cap but needed until November “to do so in an orderly fashion,” according to an SEC filing.

The board amended its rules so the 10% limit wouldn’t take effect until Dec. 1, 2015.

A truck squeeze
Overcapacity and weak demand have squeezed trucking companies over the past year. In September, Swift warned it would miss its earnings targets for 2015 and announced its first stock-buyback plan since it went public for the second time in 2010. Swift said shortly afterward it would halt the expansion of its truck fleet.

In October, Mr. Moyes told the board he hadn’t reduced his borrowings as promised. Owing to a drop in the stock price, he had pledged additional shares to meet margin calls, according to an SEC filing. More than 15% of his holdings were now pledged, he said, and he needed more time to comply with the board’s limits.

Independent directors met and sanctioned Mr. Moyes, saying he would forfeit two months of salary and his 2015 bonus. They asked him to reduce the portion of his shares pledged as collateral to 15% or less by Nov. 4, according to an SEC filing.

As for the 10% limit, the board delayed imposing that for another year—until the end of 2016—“so that the margin positions could be reduced in an orderly fashion,” according to the filing.

On Christmas Eve, Swift said that “as a result of recent volatility” in the stock, Mr. Moyes had once again increased the amount of his Swift stock pledged on margin loans, exceeding the 15% limit. The board waived the 15% restriction, giving him until the end of 2016 to reduce his position, according to SEC filings.

According to SEC filings, Mr. Moyes has pledged some eight million shares of Swift as collateral for margin loans, as well as more than 29 million shares in complex transactions typically called “variable prepaid forward contracts” with Citigroup Inc.

These loan-like agreements gave the CEO cash upfront in exchange for his pledge to deliver some of his shares or cash in the future. For example, on Oct. 30, Mr. Moyes pledged 3.3 million shares to Citigroup and received $48.3 million in cash. Citigroup declined to comment.

The CEO’s total shares pledged either on margin loans or in the Citigroup contracts amount to more than 60% of his family’s Swift holdings. But Swift’s board counts only shares used for margin loans against its pledging limits for executives.

After reporting quarterly results this week, Mr. Moyes on Tuesday called for a $200 million stock buyback and said he would seek board approval in February. “I believe that the share repurchase at these ridiculous low prices can make a lot of sense,” he told investors on a conference call.

He said that the first share buyback had added four cents to per-share annual earnings and that a second, larger one would add 8 to 10 cents a share. The company said in a written statement that its “business performance continues to be strong as evidenced by the seven-percent increase in revenue and eight-percent increase in adjusted earnings per share in 2015.”

The new buyback proposal puts Swift out of step with a consolidation trend in the trucking industry, which has seen many of the largest companies seek to build revenue by acquiring competitors. In the call with analysts, Mr. Moyes said Swift had a chance in the past year to acquire another company for about $500 million but concluded that a share buyback would raise earnings more than an acquisition, with less risk.

Some analysts agree, saying repurchasing shares was a better use of Swift’s capital than taking a risk with an acquisition. “People agree with the move regardless of Moyes’s financial situation,” said Mr. Hatfield of Raymond James.

Other investors, among them the Teamsters, said the limits put in place by the company don’t go far enough because they don’t apply to the arrangements with Citigroup. Mr. Moyes is “using Swift as his personal bank,” said Carin Zelenko, director of the capital-strategies department for the Teamsters union, which holds a stake in Swift. The board’s limit on the pledging of shares “was only addressing part of the problem, and now we see they can’t even hold him to that,” she said.

Swift said Mr. Moyes’s arrangements with Citigroup aren’t margin loans, and the company’s treatment of them is consistent with policies in place since Swift’s IPO in 2010.

Article on the WSJ pagehttp://on.wsj.com/1QwcTvi