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Philip Brown
This article presents the speech delivered by Philip Brown of the University of New South Wales at the University of Sydney Pacioli Society Meeting on April 29, 2003. Options can improve the alignment of shareholders' and managers' interest but they can also make it worse. Options also provide what are believed to be much needed incentives for managers to take on desirable risk. Institutional investors have wished to see others share the pain of the prolonged bear market. They are the main reason why smaller companies have been unable to use options more recently. They have opposed the cancellation and re-issue of outstanding options that are deeply out-of-the-money. Because of their complexity, options are not well understood by most company directors. One might well wonder whether board-level ignorance could have created ideal conditions for some self-serving executives, who do not understand their value, to try to steal a good part of the farm from right under the directors' noses. However, even if options have retained a substantial part of their incentive effect, boards still need to be sensitive to the impact on managers' wealth of declining values of executive options and the fact that the impact has not been uniform across all sectors.
