CII Presses Companies on Options Policy

Letters were sent to 1,500 companies asking them to explain how they granted equity awards. A handful have responded, so far.

(Correction: This is an updated and corrected version of the story that initially ran on CFO.com on July 25, 2006. Updates include the information that Harsco does not issue option grants, and that Fortune Brands conducts regular reviews of its options policy.)

At least 30 companies have responded to a letter sent out earlier this month by the Council of Institutional Investors (CII) seeking details about their options policies.

The letters, dated June 12, were sent to the chairs of the 1,500 largest U.S. companies by market capitalization asking them to explain: how they granted equity awards; whether they were conducting an internal review of past stock option practices; and whether they were under investigation by the SEC or any other law enforcement agency for stock option-related practices.

So far, three respondent companies said that they do not issue stock options. Of the remaining 27, three—Comcast, FedEx, and Fortune Brands—said that they conduct regular reviews of their stock option policies. Another 12 noted that they have not conducted recent policy reivews, while 13 did not respond to the question.

Fortune Brands, for example, noted in its letter that it does not backdate stock option grants, and that its compensation committee reviews options granting practices twice year. “We confirmed that our procedures and practices for granting stock options conforms to best practices,” noted Fortune Brands spokesman Clarkson Hine. (See “Related Links” at the end of this page for links to the actual letters.)

The FedEx response letter said its review found no evidence of backdating, and noted that all options grants are made at an exercise price greater than, or equal to, the fair market value of FedEx stock at the time of the grant.

None of the companies said they are the subject of a regulatory probe, and 24 stated that they are not. Meanwhile, five—including 3Com and Archer Daniels Midland—did not respond to the question. The question does not apply to the remaining company, Harsco, because it does not grant options.

As for their option granting policy, 20 companies said they grant them annually, with 13 of them adding that they options are granted with a strike price equal to the stock price on the grant date. Another three companies said options are granted annually, with a strike price equal to the stock price the day before the grant date. Meanwhile, one company, Philadelphia Insurance, reported that options are granted on dates set by the compensation committee.

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