Public Canadian companies are required to include the cost of stock options among their expenses. We like this accounting rule for several reasons.
First, stock options can work against you. After all, as top management exercises options, the rising number of shares dilutes your stake. For example, all else being equal, more shares will reduce your earnings per share as the profit is spread over a greater number of shares.
Indeed, companies that buy back their own shares often say they do so to ‘enhance shareholder value’. What this means, of course, is that the opposite—issuing more shares through stock options—must reduce shareholder value.
A second reason we like this accounting rule is that it’s something that’s completely within management’s control. This is better than, say, the rule where foreign exchange rates—which are beyond management’s control—have an impact on the company’s financial results.
Third, since management controls the size of the stock options, this accounting rule is likely to restrain new grants. After all, if management awards itself obscene numbers of stock options, they run a greater risk of incurring the wrath of big institutional shareholders. It wouldn’t be the first time that anger and (secretly) envy, cost managers their jobs.
The Investment Reporter, MPL Communications Inc.
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