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Ian Campbell

Ian Campbell

Through his www.BusinessTransitionSimplified.com website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world…

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Corporate Governance - General, Bonusing and Stock Options

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:

  • bonuses for 'extraordinary' successful efforts that are beyond what one would expect an executive to 'do for a salary'; and,

  • share options granted or re-priced downward for any reason.

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:

  • some years ago, I met with a company President and Board member who was recommended to me by a financial advisor I was working with at the time. The President was interested in me participating in a private placement, which I did. I specifically discussed the Board's option policies with him during that meeting, and was told options were only granted in the context of specific achievement - and that completing the private placement I was being asked to participate in would not result in immediate optioning. Shortly after the closing of the private placement the Board of the Company granted options to both Board Members and Management that in aggregate totaled 10% of the shares issues in the private placement. I called the President, told him:

    • that when the hold period on the shares I had just purchased was up I would be immediately selling the shares at whatever price they then fetched (which I subsequently did at a loss), and

    • that I would never again purchase a share of any company he was associated with.

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

  • on another occasion I owned a large number of shares in a resource junior that had, and I continue to believe has, significant commercial potential. I met with one of the independent members of the Board of that company and specifically asked him whether the Board would ever considering re-pricing existing options downward in the face of what had been a significant drop in the price of the company's stock. He told be in unequivocal terms that would never happen. One month latter that Board didn't re-price existing options, but granted a large number of options to both Board Members and Management that in my view effectively was the same thing - and in fact resulted in even greater shareholder dilution. I am no longer a shareholder of that company, even though I did well by way of return when I sold the shares I held. Absent Board and Management changes I will not repurchase shares in that company, even though I think it to be a very good 'long-term speculative investment'.

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.

 

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