August 24, 2006

Practical Guidance on Option Grant Practices

I continue to be astounded by the number of firm memos we are posting in our “Timing of Stock Option Grants” Practice Area on – and many of the more recent ones aim to provide practical guidance rather than rehash what is in the mainstream press.

My good friend Kris Veaco, who recently left McKesson Corporation (where she was Assistant General Counsel and ran the Corporate Secretary’s office) to start her own governance consulting firm, provides her own practical guidance for those grappling with how to establish sound option grant processes:

“Given all of the issues surrounding stop options these days, I was wondering what kinds of governance practices companies have in place with respect to their stock grants. I have heard from seasoned stock administrators that companies with few resources and/or a lack of appreciation for the complexities of stock administration would assign that function to the CEO’s assistant or someone else with little or no qualifications in the area.

Alternatively, those preparing the materials for the Compensation Committee (or other Board Committee with the authority to award stock grants) may not appreciate the corporate governance requirements necessary to have effective grants. The SEC’s new requirements for disclosure in the proxy may address some of these concerns, but there may still be room for practical information on how the process should work.

Well in advance of the Committee meeting the process for determining who will receive grants, what kind and how many should occur so that by the date of the meeting the list of recipients is known and fixed. The materials presented to the Committee, including the draft resolutions for the Committee’s approval, should provide the Committee with who is getting the grants, how many shares or options or units per recipient and in total, the vesting schedules, and the grant date (based on plan language) and how the price will be determined.

The plans I have seen establish that the grant price will be the closing price on the date of grant, which is very clear and easy to determine. The date of grant is usually the date of the meeting unless it is close to an earnings release or some other significant event, and then the regular practice might be that the grant date will be some period of time following the release of the earnings – 3 business days, 5 business days, 48 hours – something to allow the market to absorb the information and be reflected in the stock price.

If the grants are made via unanimous written consent, then the effective date of grant will be the date the last signature is received unless some other future date is noted in the resolutions. Of course, the minutes should reflect the Committee’s actions and include the list of recipients, and original signatures are required for the minute books for if the consent process is used.

Of course, if there are grants to any Section 16 insiders, then the process has to include advance notice to whoever files the Forms 4 as well as a follow up on the date of the meeting to ensure the numbers or terms did not change.”

I’m hoping Kris will become a regular contributor to this blog as she clearly has a lot to offer! She is currently setting up her new business, but for the time being can be reached at

Latest Challenges for Compliance Programs

In this podcast, Jeff Kaplan, Founder and Partner of Kaplan & Walker, explains how to deal with the latest challenges on compliance programs, including:

– How are “best practice” companies dealing with compliance program challenges?
– What do you mean by third-party compliance? And how are companies responding?
– What are the challenges in dealing with the “tone at the middle”?
– Given how busy boards and senior executives are, what are effective strategies for meeting the new standards for compliance program oversight and management?