To the Editor, The Financial Times
Sir,
As a voluntary organisation representing private shareholders, we do not share Proshare's or the Semiconductor Industry Association’s opposition to the proper recognition of the costs of share options (FT letters 21/11/03).
We certainly do support the aim of wider share ownership. But we believe the way forward is a partnership between shareholders and companies based on integrity and openness, not on finding ways of remunerating (especially senior) employees that escape proper accounting.
We suggest "result-based" accounting has permitted some of the worst corporate scandals in recent years, and we applaud Sir David Tweedie's efforts to bring accounting back into good repute. Surely we are not to add hiding the true cost to shareholders of share options to other "acceptable" sins such as manipulation of earnings per share, and hiding liabilities from the balance sheet?
Diane Hay's argument is "please don't make companies account properly for share options, or they will stop giving them". What does this say about the integrity of companies making these decisions? Does it mean that share options are a "good thing"? Or only if the cost is hidden?
Determining the cost of share options does not require smoothing or fudging. Ask any employee, on the first day that he is permitted to exercise his options and sell his shares, what his profit is, and he'll tell you. It's the market value of the shares on that day, less the cost of subscribing to the options. This is the employee's true profit from the options; after that date, he is effectively a shareholder.
Prior to that date, which we could call the first date of certainty, we believe the company's liability for the share options should be reported using a best estimate of the employee's true profit. The change in that liability estimate each year, including the initial grant, should be identified and reported as part of the company's profit or loss during the period.
We regard share options as a flawed method of remuneration that does not encourage the proper long-term management of companies - quite the opposite in fact. There are better alternatives that involve employees becoming proper shareholders, buying shares in the market. Indeed, we would like to see senior managers required to apply part of their cash bonuses to purchase shares, which they are then required to hold for long periods.
In the case of a high-tech start-up company which has little free cash and wishes to give incentives to employees, a much more honest approach than share options would be for the company to create shares, value them at the market price, and then give them to employees, with suitable minimum holding periods before they could be sold. Before doing this, it should go without saying, the company should ensure the majority of existing shareholders give their approval!
Martin White
United Kingdom Shareholders’ Association
