March 27, 2014
Coke’s Cautionary Tale: Fungible Share Requests
– Broc Romanek, CompensationStandards.com
Here’s analysis from Mike Kesner of Deloitte Consulting: Many of you probably have heard that one of Coca-Cola’s shareholders is opposed to the company’s new stock plan share authorization, as noted in this article. While I disagree with the arguments made by the shareholder, I believe this is a cautionary tale about fungible share requests.
Here are the facts based on Coca-Cola’s latest proxy:
– Coca-Cola is requesting that shareholders approve a 500 million share request.
– The number of shares being requested represents 11.3% of shares outstanding, which is incredibly high compared to most large cap company share requests.
– Coca-Cola explains that they have been granting 60-73 million shares per year the last 3 years, and that the new authorization should last 4 years.
What they did not explain clearly is that based on a fungible share ratio of 5:1, and the current mix of options and RSUs, a grant of 60 million shares is the equivalent of around 156 million shares (given the higher stock price, they will probably grant less than 60 million shares). They could have also explained the total shares expected to be awarded will be closer to 240 million shares (or 5%-5.5% of shares outstanding, which is much more reasonable). The 500 million shares is a fiction – it assumes all LTI awards are granted as options, which is highly unlikely.
The fungible share idea works well when dealing with ISS’ Shareholder Value Transfer methodology, but some institutional shareholders only look at simple dilution when evaluating the reasonableness of a new share request.
Thus, Coca-Cola retained the flexibility to switch their LTI awards to 100% stock options and may have inadvertently alarmed shareholders that they intend on granting 11.3% of shares to employees, when in fact that is not the case. Instead, they could have asked for 240 million shares (with a sub-limit on restricted shares of 40% or 96 million shares) without setting off alarm bells about excessive dilution.