Stock Options Called "Theft" by Major UK Investor
Hermes Investment Management, which manages £50bn of
pension fund cash for the Post Office and BT, said it wants
American companies to put their share option packages to a
shareholder vote before they are introduced.
The company also said the stock options plans used by many US
corporate boards of directors amounted to “theft.”
The strong words were made in a comment letter to the NASDAQ
and voiced a similar criticism made by TIAA-CREF, which also
called for curtailing stock options abuses Wednesday.
Not Enough Accountability
In the Hermes comment letter to the NASDAQ, the firm said
“many of the stock option plans in operation at Nasdaq-listed
companies, in particular, involve a considerable transfer of
wealth from the existing shareholders to the directors and
officers.”
“This is more than just a capital allocation decision; in any
other form of asset ownership such a transfer without the
approval of owners would be considered theft.”
Hermes noted that some US companies can have more than 30% of
their shares “owed” to directors and senior managers in stock
option plans. Options dilute existing shareholders’
interests, distort financial statements at the company, state
and Federal levels, and have even tilted the odds in
corporate mergers so companies with less or no profits can
acquire larger companies if they have tax credits to bring to
a merger.
Microsoft, for instance, has outstanding options representing
more than 20% of outstanding stock. Such options can be
awarded to management by management, or from management to
employees, but all of it is usually done without shareholder
approval.
Michelle Edkins, director of corporate governance at Hermes,
said there is “clearly a conflict of interest” when corporate
directors give away part of the company without notifying
shareholders.
In the UK, the London Stock Exchange code, calls for votes by
shareholders when option packages are introduced. Companies
can change the terms of existing options programs without
obtaining any additional shareholder approval. The maximum
stock overhang permitted is 10% over 10 years.
– Chuck Epstein
editors@plansponsor.com