Hedging constitutes the adoption of an investment position intended to offset potential future losses of a different investment position. Relating to executive compensation, executives have been criticized for using hedging as a way to mitigate the risks associated with not having a diversified stock portfolio. Hedging has a negative impact on executive incentive plans because it diminishes the incentive nature of equity as compensation and thus interferes with the intended alignment with shareholders. Additionally, hedging has the potential to encourage executives to engage in risky behaviors due to the decreased likelihood of suffering negative financial consequences resulting from decreased value of company stock. Hedging is permissible, but many large companies forbid the practice as part of their company insider trading plans. The Dodd-Frank Act, once fully implemented, will require companies to publicly disclose whether or not they allow executives to hedge company stock. Because there are methods (i.e. pledging and Rule 10b5-1 plans) which help executive achieve the same financial results as hedging without the harmful side effects, the Center does not support hedging as part of executive compensation plans.