Last summer, when the tide of corporate scandal was at its height, a plan to give shareholders veto power over moves by companies to dole out stock options had nearly universal support. But with the scandals fading into the background, the proposal is stalled at the Securities and Exchange Commission, which concedes that the rule will not go into effect in time for annual shareholder meetings this year.
In the meantime, directors of at least one big company, Texas Instruments, have approved the sort of big stock option plan that the proposal is intended to police. Some shareholder advocates _ who object to investors' ownership being diluted when companies issue options in large volumes _ worry that other companies, too, will rush new options plans onto their books, in case the rule goes into effect by the end of the year.
The rule, proposed in August by the New York Stock Exchange, would require companies whose shares are traded on the exchange to put all new stock option plans to a vote of their shareholders. The rule would also stop brokerage firms from voting the shares of customers who have not voted themselves. Such broker votes are always cast with management on matters that come up for a shareholder vote.
Institutional shareholders, especially those managing public pension funds, applauded the proposal, as did individual investors who filed comments with the SEC. Rocked by scandals at companies like Enron and WorldCom, they have become more alert to the complexities of corporate finance, including the ways that stock option plans can dilute their ownership stakes and mask the true costs of compensating employees.
Investor groups say the SEC has missed a big opportunity to arm shareholders as the annual meeting season begins.
"Executive pay and abuses in the stock option area are at the top of the reform punch list for investors, and this was the major fix that was being called for," said Patrick S. McGurn, special counsel to Institutional Shareholder Services, a shareholder advisory firm in Rockville, Md. "Now we're basically left with the status quo that produced some of the abuses that have come to light."
Two weeks ago, at an Institutional Shareholder Services conference in Washington, Martin Dunn, senior associate director for the SEC's division of corporation finance, said that the rule's passage was imminent. The rule was formally submitted to the SEC for approval Oct. 6.
But Wednesday, Christi Harlan, a spokeswoman for the commission, said the rule was not ready for a vote _ and in any event, would have to have been adopted by January to have given shareholders a voice in stock option plans this year.
"Realistically, it won't be done for this proxy season," Harlan said.
She explained that the commission had been busy implementing rules mandated by the Sarbanes-Oxley corporate oversight legislation passed by Congress last year. In addition, she said, it proved complicated to harmonize the New York Stock Exchange's proposal with a parallel set of rules submitted by the Nasdaq market. The markets set rules, subject to SEC approval, for companies whose shares they trade.
According to people participating in the rulemaking process, the actions of Nasdaq officials appear to have slowed the approval process.
Nasdaq's proposed rule on stock option plans is weaker than the Big Board's in several areas. For example, while the New York Stock Exchange proposal requires a shareholder vote when a company wants to assign new, lower exercise prices on previously granted options, Nasdaq's does not specifically require shareholder approval in such cases.
In addition, Nasdaq has not proposed requiring a shareholder vote when companies replace existing options whose exercise prices are well above the stock's current market level with new options carrying a lower exercise price. The New York Stock Exchange's rule would explicitly require a shareholder vote in such cases.
Bethany Sherman, a Nasdaq spokeswoman, declined to comment on the suggestion that Nasdaq was to blame for the delay in implementing the rules.
"In terms of repricing options and replacing underwater options, our position is shareholder approval should be required for any material amendments to existing plans," Sherman said. "And we'd consider repricing or replacing a material amendment."
McGurn said her comment seemed to reflect a change in Nasdaq's thinking. "That is not what they suggested to the SEC," he said. "I applaud them if they are changing their interpretation, but that has been a point of resistance."