Stock Options Called "Theft" by Major UK Investor

February 8, 2001 ( - Criticism of stock option programs used by large US corporations continues to mount, this time from one of the UK's largest shareholders.
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