Push-back against stock option schemes growing among investors

Shareholder opposition to stock option schemes by listed companies is growing. In its recent study on shareholder voting patterns on company resolutions, proxy advisory firm IiAs said that stock option schemes were witnessing a push-back from investors. Also, the study thrashes the myth that domestic investors do not participate in huge numbers in voting on resolution.

"Contrary to public perception, the most push-back from investors was not on related party transactions, but on resolutions relating to the approval of stock option schemes. Investors test for an alignment of interest with these schemes while companies think of these as either deferred compensation or cash saving schemes. It is the widening difference between these two vantage points that makes stock options schemes the most controversial of all resolution categories," IIAS said in its recent study.

Under the stock option schemes the companies issue shares to employees at a predetermined rate, which is usually at discount to the market price. This is to encourage employees to stick to the company and give them a sense of ownership.

Amit Tandon, MD, IiAS is of the view that domestic investor participation in voting is likely to reach 90 per cent.

“Institutional investors voting 77% of their shares is a clear sign that the focus on Stewardship by the regulators - SEBI, IRDA and PFRDA, is having the desired impact. It also busts the myth that domestic investors don’t vote,” said “We expect this number to soon cross 90%. This is going to change the dynamic between investors and companies,” he added.

According to Hetal Dalal president and COO, IiAS, there is a steady shift away from a tick-the-box to a more nuanced approach in investor voting.

"Investors are being more thoughtful while voting on individual resolutions and engaging with companies before voting against a resolution. This is reflected in the voting patterns,” she added.

Key findings of the IiAS study:

There were 687 shareholder meetings held during the year, in which 3,776 resolutions were presented to investors for a vote;

Five resolution categories accounted for over 80% of the resolutions. These are director appointment 1,295 or 34.3% of the resolutions, adoption of accounts (562, 14.9%) remuneration and compensation (459, 12.2%), auditor appointment and remuneration (430, 11.4%), dividend distribution (335, 8.9%);

15 of the 3,776 resolutions presented last year by the NIFTY500 companies were defeated. Of the 13 resolutions withdrawn during the year, some were withdrawn on the morning of the meeting, possibly suggesting that these resolutions too may have been defeated.

Promoters owned 55.96% of NIFTY500 companies’ equity and voted 91.6% of their shares – their abstentions can be attributed largely to those resolutions that required a majority of minority vote. When they voted promoters almost always voted in support of the resolutions – the 0.03% of the times they voted against any particular resolution is largely in case of intra-promoter group disputes.

Institutional investors

Institutional investors too seem to be supporting resolutions more often than voting against. This investor group owned 26.83% of NIFTY 500 companies’ equity and cast 77.14% of eligible votes – the abstentions attributable to either conflict of interest or if they owned passive stock. But this is set to change as SEBI has mandated that mutual funds are required to vote resolutely on all shareholder resolutions – other asset managers are expected to follow suit.

Institutional investors cast 4.15% of their votes against resolutions. There were 18 resolutions this year on which institutional investors unanimously voted against.

Contrary to public perception, the most push-back from investors was not on related party transactions, but on resolutions relating to the approval of stock option schemes. Investors test for an alignment of interest with these schemes while companies think of these as either deferred compensation or cash saving schemes. It is the widening difference between these two vantage points that makes stock options schemes the most controversial of all resolution categories.

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