Risk & Compliance

Shareholder Activism

Running Out of Options
Tim ReasonAugust 1, 2002

CFO Bud Robertson got a rude shock in April when investors at the company’s annual meeting voted down his plan to replenish Progress Software Corp.’s stock-option pool. He now faces a dilemma about how to compensate his employees, many of whom normally receive options. “We have enough options to do most of this year’s grant,” he says, “but next year it could be a big problem.”

Robertson knew before the meeting that Institutional Shareholder Services (ISS), a proxy advisory group, had counseled large investors to vote against the options. Progress’s overhang–the percentage of total shares represented by outstanding options–already exceeded the level ISS considers acceptable. “We knew going in that the vote was going to be close,” he says. “One or two big shareholders can swing it the wrong way.”

But he also thought he could convince enough large investors to disregard ISS’s position on the options overhang, as he had two years earlier. He argues that the overhang is largely caused by stock buybacks, a five-year vesting period, and his employees’ tendency to hold their options–all of which investors applauded. And Progress is no dot-com start-up. The Bedford, Mass.-based firm is profitable, has $191 million in cash (conservatively invested), and last year produced a 32 percent return, while its peer group lost 29 percent.

But times–and proxy committees–have changed. “People who would listen to reason before won’t now,” says Robertson. He believes proxy committees are now rigidly adhering to ISS guidance to protect themselves in the event of a shareholder lawsuit.

“What’s changed is not that investors are slavishly following our recommendations this year,” counters Patrick McGurn, an ISS vice president. “They’re just not buying the arguments being made by issuers.” Institutional investors may have waived their guidelines in the past, he adds, but now they have hardened their stance. “I think we have seen a permanent change in the difficulty some companies will have getting shareholders to approve additional [option] allocations.”

Progress’s experience, he contends, is a common one. “Votes against [option] plans have been rising on a regular basis,” says McGurn. “Blame it on Enron, not ISS.” Selling investors on a firm’s specific merits is a matter of trust, he says, “and the trust level is quite low right now.”

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