March 27, 1998
Market Place: Stock Options That Tend to
Raise Ire of Investors
By ADAM BRYANT
When a company with a falling stock decides to lower the price at
which its executives can buy shares, many investors become
infuriated. The practice -- known as stock option repricing -- is widely
denounced as a giveaway to managers who may be to blame for the poor
performance in the first place.
"Repricers are public enemy No. 1," said Patrick McGurn, director of
corporate programs at Institutional Shareholder Services in Bethesda,
Md. Given that stock options are most often granted to managers to
marry their interests with those of shareholders, "repricing is comparable
to cheating on your spouse," McGurn said. "There is an element of trust
that is exploded."
Criticism aside, investors usually have little say on the matter. But some
big institutional investors are asking companies to get their approval
before repricing. And one big investor is not stopping there.
The State of Wisconsin Investment Board, a large pension fund, recently
tried to place a resolution on the proxy of Shiva Corp. that would require
shareholder approval for any repricing of options. Shiva, a
telecommunications company in Bedford, Mass., denied the request,
arguing that it was a general compensation matter that did not need
shareholder approval.
The Securities and Exchange Commission effectively sided with Shiva by
saying it would follow precedent and take no action on the matter. The
Wisconsin board is planning to appeal the decision by the SEC staff to the
full panel of the commission. However, the panel rarely overturns a staff
decision.
The Wisconsin board, with $55 billion in assets, said that if its appeal was
denied, it would go to court to request that the company's bylaws be
changed. "Repricing saddles the public owners with the entire loss in
stock value, rewards the ones in control of the company for a stock-price
drop and avoids shareholder approval," said John Nelson, investment
director of the board. "I cannot think of any subject more appropriate for
shareholder involvement than that."
Criticism of repricing is growing. In such a long bull market, managers
have a tougher time explaining that broader market forces are hurting their
stock, as many executives did after the stock market crash of 1987.
Stock options are also rising as a percentage of shares outstanding at
many companies -- cause for concern to many investors -- so the impact
of a repricing is gaining as well. And many investors are not convinced by
management arguments that repricing options is required to retain
executives who might otherwise be lured away by competitors.
Repricing is most common among technology companies. A study
published in 1997 by Westward Pay Strategies, a compensation
consulting firm, found that 14 percent of 250 large technology companies
had repriced options in the previous year.
According to Institutional Shareholder Services, the companies that have
disclosed option repricings this year without seeking approval from
shareholders are Actel, Adaptec, Informix Software, Netscape
Communications, Seagate Technology and 3Com.
It also noted that the practice was not limited to high-technology
companies -- Best Buy, Kmart, Michaels Stores and Phillips-Van Heusen
also disclosed repricings last year, it said.
Some companies have said they oppose repricing, including Monsanto
and Campbell Soup. Many more companies are agreeing to seek
approval from shareholders to reprice, but not all are doing it willingly. In
many cases, big shareholders say without it, they will not approve a
company's plan to issue more options.
Last fall, the Wisconsin board sent letters to 22 companies that seemed
most likely to lower the prices on options, based on a number of factors.
Officials of the Wisconsin board said that Shiva made the list in part
because it had authorized options representing 30 percent of all
outstanding shares (the average at big companies is 10 or 11 percent).
While Wisconsin has so far won agreements from 16 companies to get
shareholder approval for repricing, Shiva did not agree. Shiva officials
declined to comment for this article.
The SEC said its decision was in keeping with previous cases involving
Wellman, Wal-Mart Stores and Pepsico, among other companies.
Corporations are governed by state law, and in general, stock-option
matters are considered "ordinary business" issues that do not require
shareholder approval.
"Our letter represents no change in position," said Brian J. Lane, director
of the SEC's division of corporation finance. "Historically, issues regarding
general work force compensation, including options, have been viewed as
ordinary business matters."
Arthur Levitt Jr., the SEC chairman, has said that shareholders need to
watch repricing to determine whether management is acting in its own best
interest or that of shareholders. There are cases in which repricing
appears to have worked in shareholders' favor. When Louis V. Gerstner
became chairman of IBM in 1993, for example, the board offered 1,200
managers the opportunity to exchange -- at a ratio of 2.5 to 1 -- their
worthless options for new options at a lower price. The board said the
move was intended to retain talented managers; given the company's
strong performance since then, few have quibbled with the move.
The Wisconsin board could try to solicit support from shareholders for its
resolution, now that management has denied it space on its proxy. But
officials of the Wisconsin board said that such a battle would cost up to
$300,000, rather than the $15,000 needed to put a resolution on
management's ballot.
Kurt N. Schacht, general counsel of the Wisconsin board, said the board
was hopeful that the full panel of the SEC would overturn the
commission's earlier ruling on Shiva. But he is preparing to go to court to
change Shiva's bylaws, and even go back to the SEC if it encounters
resistance from other companies. |
