Posted on 06/27/2003 8:04:22 AM PDT by Starwind
Long-Awaited Option Vote Rule About To Become Reality
. By Phyllis Plitch Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--More than a year after the nation's stock exchanges went to work reviewing listing standards in an effort to restore investor confidence, the first of a batch of corporate governance reforms is finally becoming a reality.
Under new market listing standards expected to be approved by the Securities and Exchange Commission Friday, companies will have to bring most stock option plans to a shareholder vote.
Once the rules are in place, companies trading on the New York Stock Exchange, Nasdaq and other exchanges must ask for investor permission before adopting equity compensation programs with some exceptions, such as those granted to "induce" new executives to join the company.
The rules also eliminate stockbroker discretion on equity compensation plans; brokers will no longer be allowed to vote shares in favor of plans for investors who don't cast their own vote at annual meetings or otherwise communicate voting instructions.
Under a decades-old NYSE regulation, brokers currently have authority over shares they held for their brokerage clients on certain "routine proposals," including stock-option plans with potential dilution of 5% or less of a company's outstanding shares.
The combination of the two provisions will "obviously make option plans more difficult to pass because it gives increased voting power to institutions," said John Wilcox, vice chairman of Georgeson Shareholder Communications Inc., a New York proxy solicitation firm. "It means they will have to adopt plans in line with the preference of institutional investors in order to get plans approved."
Indeed, with the expected approval, reported Friday by the Wall Street Journal, activist investors will finally get what they have been advocating for years: greater shareholder control over large stock option plans.
"We have been pressing for this reform for more than five years, so we think this is a very important step," said Ann Yerger, deputy director of the Council of Institutional Investors, a large pension fund association, praising both the overall thrust of the rule, and the elimination of broker voting. "This means that real investors will have a real say on these programs, which actually do cost investors."
At the same time, the delay in approving the rule meant that one more annual meeting season came and went without companies being required to seek approval on broadly distributed option plans. The SEC is expected to direct the exchanges to change their listing standards as of Monday, but at least one legal observer following the process said the broker vote change would not go into effect until Sept. 30.
It was February 2002, several months after Enron Corp. (ENRNQ) erupted in scandal that former SEC chairman Harvey Pitt asked the NYSE and Nasdaq to review their listing standards. Over last spring and summer, the two exchanges unveiled a series of governance recommendations, including strengthening board and committee independence.
The stock option component was split off last year in order to expedite its passage, which was expected before the end of 2002. The remaining governance proposals are still pending SEC approval.
"I think there was tremendous disappointment that it wasn't put in place this proxy season," Yerger said. "The delay was very unfortunate for investors across the country."
(MORE) Dow Jones Newswires 06-27-03 0922ET- - 09 22 AM EDT 06-27-03
Stock Option Rules -2: Cos Say They Will Live With Rules
Current exchange rules allow companies to bypass shareholders even if executives are included in a program, as long as the grants are broadly distributed throughout the employee base.
Changing that has taken longer than expected, as commission staffers juggled a number of significant regulatory reforms, including those with congressionally-mandated deadlines. As the peak annual meeting season began to get under way earlier this year, SEC officials indicated they thought it best to wait until June, so as not to drop the new standards on companies in the middle of the peak annual meeting season. An interim pilot option rule in effect at the NYSE, which has been extended several times, also expires Monday. Adoption of the rules will finally put into effect a move that has been long resisted by many technology companies, which have relied heavily on stock options to lure new employees. Even a recommendation by an NYSE-convened task force back in 1999, calling on the exchange to increase investors' veto power, didn't lead to changes. The Big Board had no interest in adopting new rules that would be shunned by high-tech companies, unless the rival Nasdaq market followed suit - which never happened.
Then along came Enron's late 2002 implosion. Critics intensified their calls to rein in the use of options amid reports that executives cashed out options before the company's fall, while shareholders and employees lost a bundle. The thinking was that instead of aligning investor and executive interests, large stock option grants motivated executives to cook the books to drive shares higher.
Georgeson's Wilcox said he doesn't necessarily think the number of option plans will be reduced under the new voting requirements, but companies may have to shave the number of shares issuable under a single authorization.
It also means that companies will have "to do a much more thorough job at looking closely at the terms of the plans and the wording of the plans," he said, taking into account more subtle details, such as potential dilution.
The pending rules also contain new limitations on option repricing - or issuing new shares at a lower strike price - without shareholder approval. Technology companies still see the reforms as "one more way that corporations are being limited in their flexibility to retain and attract the best employees," said Harris Miller, president of the Information Technology Association of America, whose 400 members include the nation's largest hardware and software companies. "Our biggest assets walk in the door in the morning and walk home at night."
Over the course of recent months, there have been a couple of prominent examples of stock option programs being put into effect without shareholder input, including at Texas Instruments Inc. (TXN), whose board in January approved a new long-term incentive plan that made 240 million shares available to non-management employees.
On the other hand, at least some companies did go to shareholders for new plans and additional shares, said Alesandra Monaco, a project manager in Investor Responsibility Research Center's governance research service, who said the firm tracked a handful of such examples.
How many companies adopted so-called "shadow plans," won't necessarily come to light right away, however. SEC rules passed in 2001 to improve option plan transparency don't require immediate disclosure of new plans, only those in place at the end of a fiscal year.
But with many months to contemplate the listing change, some companies in Silicon Valley have already begun anticipating the expected new rules. Intel Corp. (INTC), for instance, adopted a proposal in January requiring shareholders to approve new stock option plans or amendments to its present plan, a spokesman said.
A spokeswoman at Juniper Networks Inc. (JNPR) - which last year faced some shareholder anger over a non-shareholder approved plan to reprice stock options - said "we will follow whatever rules are mandated."
By Phyllis Plitch, Dow Jones Newswires; 201-938-2357; phyllis.plitch@dowjones.com
Mark Boslet contributed to this report.
(END) Dow Jones Newswires 06-27-03 1052ET- - 10 52 AM EDT 06-27-03
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