Published December 9, 2008

More options granted as shares hit historic lows

In some cases, disclosure is late; in others, recipients are independent, non-exec directors

By CHEW XIANG

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(SINGAPORE) Some companies have taken advantage of historically low share prices in the last quarter to issue stock options to staff and directors, a development that may cause concern to investors.

Over 20 companies - many of them small outfits - have done so, going by regulatory statements filed with the Singapore Exchange.

And in a worryingly large number of cases, the grant of options was disclosed late, contrary to listing rules and raising speculation that the options could have been backdated. Also, many companies, against best practices, continue to award options to independent and non-executive directors.

Recent exercise prices are also at all-time lows as they are typically pegged to a share's market price at the date of grant. This is to the advantage of those who receive them, as options become a lot more valuable the lower the exercise prices, although option holders typically have to wait at least a year before cashing in.

'Some companies may also be granting a lot more options to compensate for existing options which are under water, which create a 'heads you win, tails I lose' situation,' says Mak Yuen Teen, co-director of the Corporate Governance and Financial Reporting Centre at the NUS Business School.

That means that bosses could net windfalls a year from now should markets recover. For instance, in March and October, Xpress Holdings, a printing company, gave its new chief executive Poh Eng Seng four million options with an exercise price of 12 cents and another four million options with an exercise price of five cents, respectively.

If Xpress's share price surges in time to 14.5 cents, its price just a year ago, Mr Poh could net $480,000 from his options.

A company spokesman said that it 'took into account considerations relating to timing, performance and cashflow' when granting options, and the grants were not 'in accordance to share price but to the company's performance as well as individual executive's performance'.

More worrying is that some companies appear to have delayed announcing the granting of options - contrary to SGX listing rule 704(27).

'There could be backdating of options,' suggests Prof Mak. 'Companies that fail to announce immediately should face enforcement actions as they are breaching the listing rules.'

Backdating refers to companies changing the official grant date to ensure a lower exercise price.

In one case of a delay in announcement, Xpress took 10 days to tell the market that it gave a total of eight million options to Mr Poh and two other executive directors on Oct 20 this year.

An earlier grant of 22 million options in September - 10 million of them to employees and the rest to non-executive directors - was revealed two days late. The company told BT that the delays 'were due to an internal administrative issue which has since been resolved'.

There are more examples. Yongnam Holdings gave half a million options to staff on Oct 16, but disclosed this on Oct 20. Admittedly, it was over a weekend. And China Auto Electronic executive chairman Rudolph Schlais Jr was given 5.4 million options in August, but this was announced only a month later. Even then, the company had to issue another announcement a week after 'for better clarity'.

Portek International in March gave 200,000 options to two executive directors, Ooi Boon Hoe and Tok Soon Chong, and announced this only in early September; Eastern Asia did the same for 550,000 options granted in July.

When properly used, stock options can be a powerful tool to align management and shareholder interests. However, 'they are not really appropriate for non-executive directors', Prof Mak says. 'Some codes now consider stock options to be a threat to independence.'

That is because at least some of non-executive directors' remuneration would depend on the companies' management.

Xpress's six non-executive directors got two million options each, while Mirach Energy, formerly China Petrotech, gave three independent directors half a million options each. Enzer Corp on Dec 1 gave two independent directors 250,000 options each. Other companies included Pan United, DMX Technologies, Fu Yu Corp, CSC Holdings and Avaplus.

Many big companies have moved away in recent years from granting large numbers of stock options - one reason being that they have to expense them under changes to accounting rules - to issuing a smaller number of performance shares that are tied to specific targets. But the bigger companies that still issue options have avoided granting them to directors and also tend to grant options at the same time every year, avoiding any appearance of timing the market.

Fraser & Neave and Wilmar gave out a total of 31 million options, worth about $84 million in all, based on the exercise prices. None were issued to directors.

A Wilmar spokesman told BT that its share option scheme was a legacy of Ezyhealth Asia Pacific Ltd, which became Wilmar in 2006 after a reverse takeover. 'Under the current scheme, directors are not eligible but we will review next year,' he said.

F&N said that options are given out at the same time every year - this year, it was delayed slightly until after the release of the financial results. No options were given to directors, as none were eligible under its executive share option scheme, said a spokesman.