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Is the ESOP dream run over?

By Govindraj Ethiraj
March 17, 2009 12:54 IST
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I cannot and will not claim to be a market expert and will always defer to that often-used but least-understood phrase, 'the market is king.' Now on to some happenings in the kingdom.

Last week, Bharti Airtel CEO Manoj Kohli sold his entire active holding in telecom services major Bharti Airtel for Rs 7.24 crore (Rs 72.4 million). The stock market (that which is king) was so shocked and awed by Mr Kohli's sudden move that it sold down the stock 6.3 per cent (the markets were up 2.25 per cent that day) while simultaneously suspecting (and suggesting) he was about to leave the company, be sacked or the company itself was in some deep, unknown trouble. Why else would, the question arose, the CEO sell stock and cash-out?

Mr Kohli was quick to deny that he was quitting. He went on to have reportedly said, "I'm just a middle-class guy. The sale is for a personal reason and only my wife can interfere in such decisions." A friend of Mr Kohli told The Indian Express that he wanted to move out of (the distant and choked, I would add) Gurgaon into New Delhi. Presumably Mr Kohli meant middle-class values and not income, else a trip to the Planning Commission is in order.

Was Mr Kohli right in selling? Actually the market's interpretation does puzzle me somewhat. As a Bharti shareholder, I ought to worry (as in, really) if Mr Mittal was bailing out, rather than Mr Kohli. Not to say that Mr Kohli is not important in the scheme of things but I am pretty sure the market did not do a balanced scorecard study before dumping stock.

And boss Sunil Mittal was quick to clarify, "The purpose of employee stock options is to use them for creating family assets and not storing them. From time to time, all senior leaders have sold shares to build assets and enjoy the fruits of their hard labour." But then there was life before Satyam and there is life after.

Be that as it may, it is interesting to chart the not so long journey that stock options have traversed in recent years. And then ask the obvious question, is the ESOP dream run over? The journey itself is quite simple, it's boom to bust or bust-boom-bust. The first boom was triggered by the late 1990s dotcom run following which there was general value erosion. But then, as we all know stock prices quickly rose again for another unheard of era of middle class riches and 'wealth creation.' And now, well, we are in bust or close to bust phase again.

The history is not too far to see. It began with Infosys founder N R Narayana Murthy and his colleagues who made ownership of stock and the rewards it offered a legitimate, not to mention dignified, middle class pursuit. After all, every employee must feel like a true stakeholder and thus have a good share of the capital appreciation of his stock -- bestowed by a kind stock market.

Now most promoters refer to stock options as an instrument of ownership. Whereas I would argue that it was mostly an instrument of compensation and wealth distribution for most people, save a few, usually right at the top. Equally, one key reason this regime of stock ownership prospered and grew was because of talent shortages.

I have always wondered what would happen when talent shortages ceased to matter and oversupply kicked in. Let's face it, how many IT engineers specialising in writing accounting code for collateralised debt obligations do you really need today? Or, for that matter, high-end application maintenance for banks when the banks themselves are vapourising.

That's question number one. Second, and this has nothing to do with Bharti Airtel as such -- do professionals owning stock options work best for the company in the long term, even if you define that as a year or two? My sense is broadly no, though many would disagree. I would submit that stocks (and thus the wealth it potentially bestows) actually propel most (not all) managers to focus on their net worth rather than their organisations' health. Meaning corners can be cut more easily when it comes to chasing revenue.

It also propels companies (including Infosys) to maintain a constant chatter with the stock market and/or convert earnings calls into song and dance shows. The reason for this is not that the five promoters want their wealth to multiply, rather they want their employees to remain protected and happy so that they don't flee to their competitors. And the stock price, as it happens, is the only affordable currency going around. At least it was.

As an aside, it also turns out that high decibel quarterly performances (I don't mean P&L statements) are no guarantee that the numbers are genuine. Satyam founder Ramalinga Raju was not lagging at all when it came to engaging the kingdom. Amazingly, he continued to do that till his last day, in office that is. One day he was all over national television and the conference call circuit defending his company's actions to 'investors,' the next day he was gone.

Companies have obviously responded to this environment by awarding even more stock to make up for the lost share prices. Except that the market, in its infinite wisdom, is now viewing stock options in quite the opposite way. It seems to be telling India's middle class millionaires that stock is no longer a currency for compensation, so stay invested. Your house will have to wait and so will the opportunity to cash in your fruits of hard labour. Not that you have much of a choice either way.

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Govindraj Ethiraj
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