What to do with bad news: a supervisor has legitimate worries about the value of the company stock in the 401 plan, but would doing something about it constitute illegal trading on inside information? - k - Ethics

HR Magazine, July, 2002 by Warren Fusfeld

When the computer's distinctive "beep" snapped Sarah Jones from her concentration on the latest financial statements, she glanced at her watch and realized it was already time for her appointment with Bob Smith, a production supervisor at Apex Corp., a medium-sized, publicly traded pharmaceutical-products manufacturer.

Sarah, vice president for HR at Apex, liked to know beforehand what people wanted to talk about, but Bob refused to tell her in advance and seemed anxious to meet as soon as possible. As she pondered the possibilities, Bob entered her office and closed the door. He was clearly worried.

"I don't know how much you know about this," Bob began, "but Apex is likely to be hit soon with a costly penalty by a federal regulatory agency." For several months, Bob explained, the production department has been unable to resolve the agency's complaints of deficient manufacturing practices. If the agency isn't satisfied with Apex's remedial efforts within a month, it will halt production of the company's top moneymaking product for as long as it takes to satisfy the agency's demands for changes in equipment and processes. Halting production for those types of changes would last about 12 weeks--maybe more.

Sarah had heard discussions of the agency's inspections and subsequent negotiations in meetings of the executive committee, but the situation had never seemed as dire as Bob painted it. A lengthy shutdown, of course, not only would cut deeply into revenues for more than a quarter but also would seriously weaken investor confidence in the company and depress its stock value.

She began to wonder if Bob was overstating the problem, even as she continued to wonder why, exactly, he had come to tell her this now.

"You know, the CEO and my superiors are probably the only people at the company who know the details of this," Bob said. They are aware, he said, that the company's responses to the agency have been "too little, too late." When production is halted, he added, "a lot of people are going to get hurt" because the stock price will drop sharply. Many employees have invested substantial amounts of their own 401(k) deferrals in Apex stock, and the company's contributions are made with company stock.

Bob wants Sarah to persuade the CEO that the company should start making 401(k) matches with cash instead of company stock. "And I think you should warn employees that they may want to move their company stock in the 401(k) into one of the other fund selections."

"Why didn't you take this to your boss?" Sarah asks him.

"Because he wouldn't do anything," Bob says, "and nothing would happen. I figured you'd see the problem and do something about it. Besides, you have access to the CEO; I don't."

As if that were not enough to lay on Sarah, Bob said he was planning on moving his own company stock to other funds--and asked her if he can tell his friends they should do the same.

Sarah is a member of the company's executive committee but is not a member of the committee that oversees the 401(k) plan. Administration of the plan is outsourced to a large firm with a solid track record in the industry. The company provides general financial education for all employees on saving for retirement in the 401(k) plan but offers no third-party advice service on how funds should be invested.

"I'm not sure what I should do--or even what I can or can't do--with what you've just told me," she tells Bob. "You've given me a couple problems. First, would it be right for you to get rid of your company stock--and tell others to do the same--now that you know some negative information that very few other people know? I think I know the answer, but I have to make sure.

"And, second, what can or should I do about recommending that the company suspend use of its stock for 401(k) matches? Should I take it to the CEO? Or to the 401(k) committee? Or both?

"I need some time to think about all this. And right now I don't know who to ask for help."

Stay Off the Brakes, Draw Up a Plan

Steve LeBlanc

Sarah is right to wonder if Bob is overstating the situation. A calm, rational approach will serve Sarah, her coworkers and Apex best. Keep in mind that nothing has happened yet. Apex is still in discussions with the federal agency, and various outcomes are possible. It's too soon to slam on the brakes.

But Sarah needs a plan. If the worst does happen, her co-workers' retirement funds (and perhaps, for some, the ability to retire at all) will rest on decisions that she and the other senior Apex executives are about to make.

First, Sarah must buy some time until she can determine the seriousness of the situation. She has to tell Bob about how insider trading regulations govern his use of the information and about his responsibility as a supervisor to prevent rumor-based panic among employees. In other words, she should tell him to "zip it." If Bob thinks things are bad now, he needs to understand he could find himself in trouble if he acts irresponsibly.

Sarah should assure Bob that she takes his comments very seriously and will begin immediately to gather additional information so she can make the best recommendations regarding the situation. Bob should also be encouraged to continue to go to Sarah as the situation unfolds. Although it's unlikely that at his level Bob would know the whole story, he could provide Sarah with valuable information as the problem develops.