A Governance Perspective on Executive Options Plans - Reflections on Some Australian Empirical Evidence
MGSM Working Paper No. 2004-4
33 Pages Posted: 28 Apr 2004
Date Written: March 2004
Abstract
The question of corporate governance has rarely if ever enjoyed greater prominence than that accorded to it at present. Significant changes to governance regulations and requirements have transpired within a comparatively brief period of time. In Australia, ongoing reform to corporate law via the Corporate Law Economic Reform Program (CLERP), changes to ASX listing rules and the formation of the ASX Corporate Governance Council (as a sample of examples) have reflected developments internationally. These include the passage of the Sarbanes-Oxley Act of 2002 in the United States and the completion of the Higgs and Smith reports into governance in the United Kingdom. An element common to the refreshed focus on corporate governance in each of these jurisdictions is a close focus on accounting, financial reporting and auditing practices. Within the context of this sub-debate, the question of the most appropriate accounting and financial reporting treatment for executive options has received a great deal of publicity. In addition, a growing body of literature has presented findings in relation to the behavioural responses apparently evinced as a result of the growing tendency for executive compensation packages to include a material options based component. Many of these findings are disquieting, since they suggest that a tool widely believed to be a positive contributor to the resolution of classic principal agency tensions and thus to good corporate governance, the option, may in fact in many cases be producing the opposite effect. We explore these findings, and use them as the basis for theorising about and commenting on empirical data we report in this paper in relation to options holdings and holdings concentrations in Australia. We find that the use of options as a component of executive remuneration in large listed corporations in Australia grew materially between 1997 and 2002 and that the growth in the award of options also coincided with a significant degree of concentration in the ownership of those options in the hands of a small cadre of board members and senior executives. We conclude that this phenomenon, to date essentially unexplored in the literature, has significant implications for the quality of governance outcomes within firms which use options as an element of their incentive and remuneration systems.
Keywords: Corporate Governance, Executive Options, Holding Concentration, Incentive Compatability
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