Lead by example

Mid-April is when many companies hold their Annual General Meetings, and I attend some of the ones of mining companies. This is the opportunity for management to communicate face-to-face with its shareholders, and for shareholders to hold management to account.

An issue that has come up with some companies this year is the matter of issuing stock options to directors and executive managers. This is a form of sharing a company’s wealth with the people who manage it or make the ultimate decisions. The options are made available for purchase over a period of a year or two, but the purchase price is fixed at the share price the date the options are issued. Both individual shareholders and the large institutional investors are starting to question the wisdom of the practice.

Issuing stock options is explained as a way of aligning the interests of the directors with the fortunes of the company, since the directors stand to benefit if the share price increases. If directors and officers of the company are major shareholders, then they will want to ensure that the share price is high (i.e., that the company is well managed and has strong earnings and good potential).

Of course, if the share price drops the options are not exercised and the shares are not bought; if the share price rises a person can buy shares at the option price and hold them or sell them immediately at the increased price, pocketing the profits. There is no down side for the holder of the options. The shareholders, on the other hand, are the losers because the number of shares increases, diluting the value of each share.

Which brings me to the larger point. Why should executives and directors of so many companies (not just in mining) make inflated salaries, and receive huge financial perquisites like stock options and interest-free loans? The value of remuneration sometimes totals in the millions of dollars, even in years when the company does not do well. What can these people possibly do to earn so much money?

Greed does not become you, leaders of industry. It makes it hard for you to be in touch with the real-life issues of your employees, clients, and most of your shareholders. It must be hard to convince employees to accept more cost-cutting measures, and to achieve the large and small efficiencies that are constantly being demanded. It must make it especially difficult to understand the issues faced by the local communities where you want to develop new mines, and with whom you are trying to negotiate sustainable futures.

Everyone deserves to be paid fairly for their work. If you are in the position of determining your own and your colleagues’ compensation, before you take your cut make sure you first reward the people who allow you access to the land and those who generate the wealth of the company.