Five years ago, Nvidia CEO Jensen Huang was worth a whopping $3.73 billion. As of this writing, his net worth has ballooned to just over $92 billion, though it’s still down from a high of $119 billion earlier this summer.
Hwang has been with Nvidia for more than 30 years, but it’s only in the past 12 months that the chipmaker’s stock price has really started to rise, and with it, increased scrutiny.
Investors are excited about the Santa Clara, California, company and the person Mark Zuckerberg has dubbed “the Taylor Swift of tech.”
But Nvidia’s rapid growth has some experts questioning whether the company’s corporate governance has matured too quickly.
They point to the fact that CEO Hwang sold about $14 million worth of stock almost every day over the summer for several months. Hwang still owns more than 3.5% of the company.
The question inevitably arises as to why Huang is selling rather than holding on to it.
And that leads to the question of why Hwang owns so many shares in the first place, and whether his compensation package incentivizes the kind of performance shareholders want.
Investors are demanding more information about who’s at the top of companies, and executive compensation experts who spoke to Fortune said they want more transparent corporate governance, open succession planning and changes to compensation structures that incentivize the next generation of executives.
“Huang’s share sale is not a good idea.”
Hwang is selling his company’s stock under a very unusual plan — a Rule 10b5-1 agreement — that allows executives and employees to buy and sell their company’s stock on a prearranged schedule without violating insider trading laws.
Rule 10b5-1 has several specific requirements, the main ones being that you use a sales formula (not an individual) to determine the number, price and dates of transactions, and you must hire a third party, independent of the client’s influence, to make the sales.
So while Hwang is far removed from the concerns of insider selling, the fact remains that he is choosing to sell after a period in which the share price rose and then fell.
That’s not a good look, according to Nell Minow, vice chairman of corporate governance experts ValueEdge Advisors.
Minow, who also owns Nvidia stock, explained to Fortune: “What I want from management is to be very bullish on the stock. I want them to be constantly thinking, ‘This is going to be worth a lot more soon,’ not, ‘Oh, I’m feeling dizzy, like I’ve got all my eggs in one basket, so I better sell some.'”
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“I want to put all their eggs in one basket.”
This isn’t the first time Hwang has invoked Rule 10b5-1 this year, but the sale has been stickier than previous transactions.
For example, in September of last year, Hwang sold 237,500 shares worth just over $117 million pursuant to a 10b5-1 transaction agreement. By comparison, in July alone this year, Hwang sold $323 million worth of Nvidia stock.
Huang wasn’t the only Nvidia executive to acknowledge the Rule 10b5-1 deal in the company’s April filing.
Deborah Shoquist, executive vice president of operations, Colette M. Kress, executive vice president and CFO, and Ajay K. Puri, executive vice president of worldwide field operations, also revealed similar plans.
“This is a sign that stocks are soaring and investors are getting a little nervous,” Minow believes. “It’s certainly worrying for investors. We ask ourselves: ‘Well, maybe I should sell my shares too. What are they trying to tell me? If they’re not confident in the stock, why should I sell?'”
Fortune reached out to Nvidia for comment on how many shares Hwang plans to sell in total and when the sale might close, but the company did not respond to questions.
Nvidia told Fortune: “Hwang’s sales were made pursuant to a 10b5-1 plan, which includes pre-determined prices, quantities and sale dates.”
Calming the ripple effect
James Reda is managing director of human resources and compensation at Chicago-based consulting firm Gallagher, and has worked on a number of high-profile compensation cases, from Howard Schultz at Starbucks in the early 2000s to advising Satya Nadella on compensation at Microsoft.
We asked Huang why he was selling a little bit of his stock every day, rather than selling a large amount all at once.
“If you just throw that out there on the market, the stock price is going to go down,” Reda told Fortune, “so you have to be very sensitive to that… If you have big positions that some of these founders and CEOs have held, that might be a better strategy.”
“I’ve seen a lot of cases where things are executed poorly and stock prices crash. It’s not because people think something is going on or anything like that, it’s just that there’s an oversupply. The market is confused about what to do with it.”
The fact that Hwang is selling almost daily, rather than at longer intervals, also doesn’t surprise Reda: Because the 10b5-1 plan is public, the market is aware of the influx of stock and won’t be caught off guard.
While some analysts like Minow want founders to focus solely on their company’s equity, Reda disagrees: “At the end of the day, if you don’t sell equity, your only option is to take out huge loans by pledging your equity, like Elon Musk and others have done.”
“That would just make everyone even more leveraged. Why would you do that? Just sell small chunks of your stock periodically.”
Do you have too much inventory?
A look at the SEC filings of any big tech company reveals a variety of often complicated compensation rules. Meta’s Zuckerberg is paid just $1 in salary but famously incurred $24.4 million in security fees. Apple’s Tim Cook has $49 million worth of performance-based restricted stock units built into his compensation package. Alphabet’s Sundar Pichai receives stock grants every three years and will receive $226 million in compensation in 2022.
The plethora of options also reveals a common practice in Silicon Valley: CEOs, especially founders, are often awarded stock on an ongoing basis, not just to maintain a sense of power over their rapidly expanding empires, but also because it’s a tried-and-true way to motivate people at the top.
According to Nvidia’s fiscal year 2024 proxy statement, Huang received $996,514 in salary, $26 million in stock-based compensation and an additional $4 million in incentive cash compensation, making his total compensation package worth approximately $34.17 million.
The filing also revealed Hwang’s Nvidia holdings before the stock sales began this spring, totaling more than 93 million shares, or 3.79% of the company.
Minow believes this is a sign that Hwang is overvalued.
Her hypothesis is that Huang’s shares should be locked with “golden handcuffs”, meaning he can’t sell them until years after he leaves the company.
“Don’t give him stock. Clearly he has too much stock and that’s why he’s giving it away,” Minow said. “The marginal value of an additional stock grant is negligible.”
Nvidia has adopted a “pay for performance” strategy based on revenue, operating margins and shareholder returns relative to the S&P 500, according to an SEC filing.
But Minow wants more details. “We’re going to set very specific goals: market share, innovation, expansion, operational improvement. That’s a job for the board. The board should decide what their priorities are,” he said.
“And then let the market know what that goal is so that we, as investors, can know whether it’s something we want to be a part of.”
Presence or absence of a succession plan
In Minow’s view, the board itself has room for further improvement: Only one of the $2.93 trillion company’s 12-member board lists “corporate governance” experience on his official resume (though several other directors have served on other boards).
Minow also hopes that by letting the market know about his CEO successor, Nvidia will take things one step at a time — after all, a CEO can’t lead forever.
“His board is very focused on technology and not so much on corporate governance,” Minow explains. “I would really like to see the board say, ‘We have processes in place to develop great talent and make sure we have deep talent. This is how we do it.'”
“We don’t need names, but they need to be upfront about the value that Huang brings to the table. And they take very seriously the idea that he might decide to just spend money. They have to be prepared for that.”
Known for his tireless work schedule and relentless pursuit of perfectionism, Huang is the heart and soul of NVIDIA and one of its highly paid employees.
“Hwang is the soul of the company and his reputation is as important as the quality of the product,” Minow adds. “How do you keep him motivated, especially when you’re talking about the 15th richest man in the world? Definitely not by allowing him to diversify his assets.”
“I’m going to give him more of a cash reward tied to very specific, quantifiable goals.”
Fortune asked Nvidia what its succession plans are and whether it plans to be more transparent with shareholders about its compensation practices, but Nvidia declined to comment.
What will Nvidia look like after Hwang?
Arup Shah, managing director at reward and leadership consultancy Pearl Mayer, said there was a need to promote transparency across the market.
Some pillars of American commerce have already learned this lesson: just ask JPMorgan’s Jamie Dimon, who has spoken openly about the banking giant’s succession-planning process, even going so far as to name “CEOs who’ve been hit by a bus.”
Meanwhile, Morgan Stanley had generated a great deal of speculation last year before selecting Ted Pick to succeed James Gorman.
“We need to be significantly more transparent about succession planning than we are today,” Shah told Fortune. “From a new CEO’s perspective, one of the top five things they need to do is succession planning. To me, it’s companies that are truly looking to the future and thinking about corporate governance properly.”
“If succession planning is not transparent and well-considered, it can lead to rash decisions being made, which creates instability from a shareholder and investor perspective.”
This story originally appeared on Fortune.com.
