Corporate Governance - General, Bonusing and Stock Options

By: Ian Campbell | Tue, Oct 16, 2012
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Why read: Because if you own shares of public companies you should always think hard about shareholder activism in the context of corporate governance, and should be prepared to participate in 'constructive shareholder activism' where you think a corporate board has introduced corporate actions or policies that appear imbalanced, inappropriate or excessive - or in the alternative 'vote with your feet'.

Commentary: Broadly across all industry sectors and companies the importance of shareholder activism cannot be overstated where Boards of Directors of companies seem on the face of things to fail to properly consider or deal with matters that appear on the surface to potentially lead to imbalance among company stakeholders. One of those potential imbalances is that between appropriate demands made upon executives for doing the jobs they are hired to do in exchange for their annual salaries, and:

A central issue around bonuses and optioning in the junior mining sector is that the development of a mining property, from exploration through production, is a highly entrepreneurial activity. Accordingly, a case can be made for reasonable 'milestone bonuses' and 'options' for senior management, and perhaps in some cases for Board Members, where entrepreneurial success is achieved.

What ought not to be acceptable to shareholders are non-commercial bonus and option policies and practices. In this regard, shareholders and prospective shareholders should always carefully assess the bonus and option practices of a company (and hence the commercial 'balance' of its Board and Management) and determine whether they wish to own shares of that company.

Where a company's Board or Management doesn't pass a given shareholder's 'propriety tests', that shareholder simply ought to consider 'voting with their feet' and elect not to own shares of that company - this given the out-of-pocket costs, opportunity costs of time, and uncertainties related to pursuing allegations of impropriety through the Securities Commissions and Courts.

In passing, it can be said that past actions may dictate future actions, and one needs to keep that in mind when assessing the Board and Management of any given company.

Two past personal examples that I both remember well, and always consider as I review and monitor companies as possible trades or investments:

I also shortly thereafter severed my relationship with the investment advisor who had recommended that President to me; and,

How each trader and investor behaves is, of course, entirely up to them. That said, I believe that how a company's Board and Management behaves around issues of bonuses and option granting goes directly to how said Board and Management ought to be assessed by shareholders and potential shareholders of their companies.

A standard mantra in the resource exploration company space is 'Management is critically important'. It is without doubt. That said, aside from past Management financial successes, prior and continuing corporate governance principles and practices of any given company Board and Management is, in my view, a very important metric by which to measure that Board and Management.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
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