ESOPs could be good corporate governance tool
ESOPs could help improve the relationship between a company's employees and its management, leading to better corporate governance
By PTI |
NEW DELHI: Doling out employee stock options ( ESOPs) could help improve the relationship between a company's employees and its management, leading to better corporate governance, advisory firm Mazars has said.
In a report titled, 'Governance Matters', the firm said that share options provide an additional incentive for executives to manage their organisation effectively and efficiently, thereby increasing share prices.
Large companies usually give their employees part ownership in the form of equity stock options. These are sometimes included in an employee's annual package or given as a performance-linked incentive. However, the idea is yet to pick up among smaller companies.
"Share options usually align a manager's goals with those of the shareholders and this helps overcome the problem of operation between ownership and control, since executives in effect become the owner," said Mazars Partner (Consulting & Markets Leader) Manish Chatrath.
Globally, there are various codes which underline the provisions for management of stock options. For example, the UK Code has a detailed provision on the design of performance-related pay structures, while the Australian Code emphasises on linking it to performance objectives and hurdles, it said.
According to the French Code, the stock option should be granted to executives without a price discount, while the German Code says that the compensation structure of the executive should be such that it does not encourage them to take unreasonable risk.
"The intention of stock options is to avoid a conflict of interest between shareholders' wealth maximisation and the personal objective of the manager," Chatrath said.
He further said that it is time the practice of corporate governance is taken more seriously, with more and more voluntary provisions made mandatory.
In 2009, the Corporate Affairs Ministry had come out with Voluntary Corporate Governance Guidelines for companies. The guidelines prescribe the norms regarding representation of independent directors on a companies' board, selection of auditors and CSR initiatives, besides other things.
Some of these provisions are also included in the Companies Bill, 2009, which is expected to be passed soon by Parliament.
In a report titled, 'Governance Matters', the firm said that share options provide an additional incentive for executives to manage their organisation effectively and efficiently, thereby increasing share prices.
Large companies usually give their employees part ownership in the form of equity stock options. These are sometimes included in an employee's annual package or given as a performance-linked incentive. However, the idea is yet to pick up among smaller companies.
"Share options usually align a manager's goals with those of the shareholders and this helps overcome the problem of operation between ownership and control, since executives in effect become the owner," said Mazars Partner (Consulting & Markets Leader) Manish Chatrath.
Globally, there are various codes which underline the provisions for management of stock options. For example, the UK Code has a detailed provision on the design of performance-related pay structures, while the Australian Code emphasises on linking it to performance objectives and hurdles, it said.
According to the French Code, the stock option should be granted to executives without a price discount, while the German Code says that the compensation structure of the executive should be such that it does not encourage them to take unreasonable risk.
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"The intention of stock options is to avoid a conflict of interest between shareholders' wealth maximisation and the personal objective of the manager," Chatrath said.
He further said that it is time the practice of corporate governance is taken more seriously, with more and more voluntary provisions made mandatory.
In 2009, the Corporate Affairs Ministry had come out with Voluntary Corporate Governance Guidelines for companies. The guidelines prescribe the norms regarding representation of independent directors on a companies' board, selection of auditors and CSR initiatives, besides other things.
Some of these provisions are also included in the Companies Bill, 2009, which is expected to be passed soon by Parliament.
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