By CHEW XIANG
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FOR richer and for poorer; in sickness and in health. When share options gained currency in the 1990s, they were meant to cement a marriage-like bond between executives and their companies. Because options - the right to buy a share at a determined price - are valuable to the extent that executives benefit when share prices rise, thus aligning them with shareholders at large. Turning salaried managers into shareholders was seen as a neat solution to the agency problem.
In practice, though, the past decade has spawned a number of devices in the issue of stock options which ensure that executives do well whether the company is richer or poorer, sick or healthy.
These include spring loading - timing option grants before the release of good news; bullet dodging - granting them after bad news; and backdating - going back to set the price of an option at a favourable date. The last resulted in a raft of investigations in the US two years ago. Last year, the first corporate chieftain to be found guilty of the offence, Steve Reyes, CEO of Brocade Communications, was sentenced to 21 months in jail and fined US$15 million.
In Singapore - generally seen as a couple of years behind the cleverness curve - nobody has yet been prosecuted and the Singapore Exchange (SGX) has rightly demanded that companies announce grants the day they are offered (so that if they go back to amend exercise prices, at least the market is kept informed).
But as we reported yesterday ('More options granted as shares hit historic lows'), a number of companies seemed to have breached this rule, on some occasions by a matter of months.
Delayed announcements
Xpress Holdings twice delayed the announcement of option grants, apparently due to an 'internal administrative issue'. In September, the announcement was held up by two days; in October, by ten days.
That's already some improvement; in March, the company gave three executive directors eight million options - and told the market only one month later.
China Auto Electronic gave its executive chairman 5.4 million options in August, but announced this only a month later. Portek International took six months to announce an option grant, while Eastern Asia waited two months.
If these cases are a breach of the listing rules, the companies should be taken to task by the exchange. It should be a public rebuke too (none of those private warnings), if only to send a clear message of disapproval to the rest of the market.
In fact, more should be done to discourage companies from the use of stock options altogether.
Of course, there are those who fear that this will disproportionately hurt smaller companies, which have found options an attractively 'cheap' way to keep executive talent while conserving much needed cash.
But options aren't cheap anymore. Under recent revisions to accounting rules, they will have to be valued and then expensed throughout the vesting period. And it has taken its toll on the bottom line of smaller firms.
China Oilfield Technology booked over 50 million yuan (S$11 million) in expenses after it granted options in January; on Dec 1, it announced that participants would be renouncing their 54-cent-a-share options. The stock last traded at about seven cents.
Stock grants
The better option is to do what bluechip companies practise these days: give deserving staff shares outright in the form of stock grants tied to specific performance targets. This is because options provide executives with what is known as asymmetric payoffs - that is, the downside is limited, while the upside isn't.
Once an option is out-of-the- money, it's essentially worthless; on the other hand, an in-the-money option is more and more valuable the higher the share price. This gives managers a disproportionate incentive to take heavy risks - the more so if, when their bets don't come off or when the stock market turns sour, they get extra grants of options at a lower exercise price. As this newspaper noted, this may already be happening.
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