Five years ago, Nvidia CEO Jensen Huang was worth a respectable $3.73 billion. As of this writing, his fortune has swelled to just over $92 billion—and even then, it’s still down from a peak of $119 billion earlier this summer.
Huang has worked for 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, drawing criticism.
Investors are generally enthusiastic about their bet on the Santa Clara, California-based company and the man Mark Zuckerberg called the “Taylor Swift of technology.”
However, Nvidia’s meteoric growth has led some experts to question whether the company’s corporate governance has matured so quickly.
They point out that CEO Huang has been selling shares worth about $14 million almost daily for months this summer, and he still holds a stake of more than 3.5% in the company.
This inevitably raises the question of why Huang is selling his shares rather than holding on.
And that leads to the question of why Huang owns so many shares in the first place and whether his compensation package is delivering the performance shareholders want to see.
Investors want more information about the top of the company. They want more transparent corporate governance, open succession planning and a change in the compensation structure to motivate the next era of management, according to executive compensation experts who spoke to Fortune.
‘Huang sells shares doesn’t look good’‘
Huang is selling his shares under a very specific plan, a Rule 10b5-1 agreement, which allows executives and employees to buy or sell shares in their own companies without violating insider trading laws by using a predetermined schedule.
Rule 10b5-1 has a number of specific requirements, the most important of which is that a formula for the sales (not an individual) be used to determine the amount, price, and date of the trade. A third party must also be hired to conduct the sales, who cannot be influenced by the client.
So while Huang doesn’t have to worry about insider selling, the fact remains that he chooses to sell after a period of high stock performance and then a decline.
According to Nell Minow, vice president of ValueEdge Advisors, a specialist in corporate governance, this does not look good.
Minow, who also owns shares in Nvidia, explained Fortune: “What I expect from a manager [is] to be very optimistic about the stock. I want the executive to be thinking all the time, ‘Boy, this is going to be worth a lot more soon,’ not, ‘Wow, I better sell some of this because I’m … feeling the dizziness of having all my eggs in one basket.’
“I want all their eggs in one basket.”
This year is not the first time Huang has used a 10b5-1 rule, although it is a more persistent sell-off than previous trades.
For example, last September, Huang sold 237,500 shares worth just over $117 million under a 10b5-1 trading agreement. By comparison, this year, Huang sold $323 million worth of Nvidia shares in July alone.
Huang wasn’t the only Nvidia executive to confirm a Rule 10b5-1 trade deal in the April filing.
Debora 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, announced similar plans.
“It’s a sign that the stocks have gone up a lot and they’re getting a little nervous about it,” Minow believes. “It’s definitely concerning for investors; we’re asking ourselves, ‘Well, maybe I should sell mine too. What are they telling me? If they don’t have confidence in the stock, why should I have it?'”
Fortune reached out to Nvidia for comment on how many shares Huang plans to sell in total and when his sell-off will end. The company did not respond to a request for comment.
Nvidia said Fortune: “Mr. Huang’s sales are based on a 10b5-1 plan, which predetermines the price, amount and dates of sales.”
Calm the ripple effect
James Reda is a managing director in Chicago-based consulting firm Gallagher’s HR and compensation practice. He has worked on a number of high-profile compensation cases, from Howard Schultz at Starbucks in the early 2000s to advising on Satya Nadella’s Microsoft package.
We asked him why Huang is selling his shares in dribs and drabs, day in, day out, rather than selling larger amounts all at once.
“If you just dump that on the market, the stock price will go down,” Reda said. Fortune“So you have to be very sensitive to it… If you have the large position that some of these founders and CEOs have, it might be a better strategy.
“I’ve seen a lot of cases where things are done wrong and inventory goes down. Not because people think there’s something wrong and all that stuff, but the oversupply. The market is confused about what to do with it.”
The fact that Huang is selling almost daily rather than at longer intervals is also no surprise to Reda. The 10b5-1 plan is public, so markets will be aware of the influx of shares and not be surprised.
And while some analysts like Minow want founders to focus solely on their own shares, Reda disagrees: “Ultimately, if you don’t sell the shares, you’re going to have to do like Elon Musk and a few others who put up shares as collateral and get these giant loans.
“That just makes everyone more dependent on leverage, why would you do that? Regularly divest and sell a little bit of shares.”
Too much stock?
A look at the SEC filings of each Big Tech company reveals a range of often complex compensation provisions. Meta’s Zuckerberg famously gets just $1 for his salary but takes $24.4 million in security fees. Apple’s Tim Cook has performance-based restricted stock units in a $49 million compensation package. Alphabet’s Sundar Pichai gets a three-year stock award, leading to a $226 million payout in 2022.
The array of options also highlights a common practice in Silicon Valley: CEOs, especially founders, are often granted ongoing stock awards, not only to maintain a sense of power over a burgeoning empire, but also because it’s a proven method of motivating those at the top.
Nvidia’s fiscal 2024 proxy filing reveals that Huang was paid $996,514, with stock awards worth $26 million and an additional $4 million in incentivized cash compensation. His total compensation package was worth approximately $34.17 million.
The filing also shows that before the stock sale that began this spring, Huang owned more than 93 million shares in Nvidia, representing 3.79% of the company.
According to Minow, this is a sign that Huang has received too much attention.
She said Huang’s shares should be put in “golden handcuffs,” meaning he would not be allowed to sell them until years after he left the company.
“Don’t give him any more stock. He clearly has too much and that’s why he’s getting rid of it,” Minow said. “The marginal value of additional stock awards is negligible.”
Nvidia employs a “pay for performance” strategy, according to its SEC filing, based on revenue, operating profit and shareholder returns relative to the S&P 500.
But Minow wants more detail. She said: “I would create very specific goals – and that’s the board’s job – around market share, innovation, expansion, improving the business. Whatever the board decides the priorities should be.
“And let the market know what those goals are. That helps us as investors to know if it’s something we want to participate in.”
The succession plan, or lack thereof
The board itself, Minow says, offers even more potential for improvement. Of the 12 people on the $2.93 trillion company’s board of directors, only one lists experience in “corporate governance” in his official biography (though some of the others have served on other boards).
Minow also wants Nvidia to check off the corporate to-do list by informing the market about a CEO successor. After all, CEOs can’t lead forever.
“His board of directors [is] “We’re very strong in technology, not so much in corporate governance,” Minow explains. “I’d like to see them say, ‘We have a process to make sure we train our top people, we have a deep bench; this is how we do it.’
“We don’t need a name, but they need to be very upfront about the value that Huang represents and that they take very seriously the idea that he can just spend his money… They need to be prepared for that.”
Known for his endless work schedule and relentless perfectionism, Huang is the beating heart of Nvidia. And that comes at a price.
“Huang is the heart and soul of the company; his reputation is almost as important as the quality of the product,” Minow adds. “Especially when you’re talking about the [15th] richest man in the world—how do you keep him motivated? It’s certainly not by allowing him to diversify his assets.
“I would give him a larger portion of his reward in cash, tied to very specific, quantifiable goals.”
Fortune asked Nvidia what its succession plan was and whether it would be more transparent with shareholders about compensation practices. Nvidia declined to comment.
What does an Nvidia product after Huang look like?
According to Aalap Shah, director of compensation and leadership consultancy Pearl Meyer, there is a need for more transparency in the market.
Some pillars of American commerce have already learned this lesson: Just ask JPMorgan’s Jamie Dimon, who has been outspoken about the banking giant’s succession planning process, even referring to the CEO who was hit by a bus as “CEO.”
Elsewhere, Morgan Stanley was the subject of huge speculation ahead of last year’s selection of Ted Pick as James Gorman’s replacement.
“We should be significantly more transparent about succession planning than we are now,” Shah says. Fortune. “From my perspective for an incoming CEO … one of the top five things they should be doing is succession planning. That to me is a company that is really looking to the future and thinking about corporate governance in the right way.
“If succession planning is not transparent and thoughtful, you have to make hasty decisions, and that, from a shareholder and investor perspective, is what creates volatility.”
This story originally appeared on Fortune.com
