Stock Options

Date: February 20, 2003

SIAS takes the view that when stock options are awarded to executives, they must be carefully designed as part of remuneration and must be justified by the value that they produce for shareholders. SIAS is particularly concerned about excesses pertaining to the award of stock options – aggravated by the fact that the associated cost is often not recognized or is underestimated. Shareholders also feel that the current practice of granting options is not sufficiently transparent.

Apart from companies exercising responsibility and self-restraint, SIAS believes that full disclosure of stock options and their associated cost is the best practical action against excessive stock options. With full disclosure, stock options would tend to be more rational and justifiable as there would inevitably be hard questions by shareholders, analysts and the media if the grants were perceived to be far out of line.

As for the cost of stock options, we recognize that there are various difficulties associated with the determination of the quantum and the timing of the expense. We are aware that the local and international accounting bodies are actively trying to develop a standard for the expensing of stock options. On our part, we feel that any reasonable estimate of the cost, notwithstanding imperfections, is better than the prevalent local practice of not recognizing any cost which is almost equivalent to pretending that there is no cost involved in the granting of stock options.

SIAS has reasons to believe that some companies may have granted executive stock options retroactively, taking the low point in a recent period to fix a low exercise price for the benefit of the executives. SIAS hopes that this is not the case as it is simply not right to backdate transactions like these.

There has also been unhappiness among shareholders that some companies time their stock option grants with sharp and temporary down spike in the stock price which do not reflect the “normal” price of the stock. This can be ameliorated with the use of a longer period for setting the reference price.

To improve corporate governance and transparency and to avoid misunderstanding, SIAS advocates the following:

Mr David Gerald J.
President & CEO
Securities Investors Association (Singapore)