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A Rising Tide of SOE Stock Option Rights

06-30 13:29 Caijing Magazine

Two company cases show what Chinese regulators didn’t know about how execs exercised their option, and how rich it made them.

By Wen Xiu

Case I – China Mobile
 
China Mobile launched a stock option incentives program in 1997. Initially, options were awarded to the company chairman and senior executives, but later more options were offered to executives at company branches.

Company President Wang Jianyu was awarded options for 600,000 shares in December 2004, and received even more the following year. At present, Wang’s nominal annual salary is about HK$ 5.05 million. But that does not include his options for 970,000 shares, which excludes the 40,000 options Wang exercised in 2007 and 85,000 in 2006. Thus, Wang is entitled to nominal earnings of more than HK$ 105 million, and net earnings of more than HK$ 73 million after deducting options costs.

Likewise, five other China Mobile senior executives and board directors are altogether entitled to 780,000 stock options, leading to potential net earnings totaling HK$ 60 million. China Mobile gave these awards to another six directors in March 1998, but none exercised the rights.

Two directors surnamed Shi and Chen exercised their rights for stock options in April 1999 as they departed the company, netting HK$ 22.27 million. A year later, former deputy chairman Li Ping exercised his options – with a corresponding market value totaling HK$ 224 million – before he left his post. They earned him HK$ 147 million.
 
In 2001, senior executives and directors did not exercise their stock options. But an unidentified number of employees exercised their rights to stock with a market value of 295 million yuan.
 
At the annual general meeting for shareholders in June 2002, China Mobile abolished the stock option program and replaced it with a new program effective for 10 years. Likewise, other state-owned enterprises listed in Hong Kong revised their stock-related incentive plans that same year.
 
The new China Mobile program is being applied to a broader range of employees and includes a shorter stock option lock-up period with few or no restraints. China Mobile said the board may take the liberty of inviting anyone from senior management and a core talent pool from all subsidiaries to claim stock options. Also, up to 40 percent of stock options granted in 2004 could be exercised within one year, while 30 percent could be exercised in the third and fourth years.

Data showed that, from 2004 to ’07, more than a dozen large stock options were exercised. These included six occurrences in 2006 and ’07. Total earnings from these deals reached HK$ 10.8 billion.

Case II – COSCO

In May, COSCO Investment (Singapore) Limited Co. President Ji Haisheng was told by his superior that he should file a report pertaining to stock options among senior executives. COSCO is in the marine shipping business and lists on the Singapore Stock Exchange. It is 53 percent owned by COSCO Holding, a subsidiary of the state-owned enterprise China Ocean Shipping Group Co. (COSCO).


On the back of rising stock prices throughout 2007, Ji and other senior executives exercised their stock options. Their moves, however, did not meet with a state policy to tighten up the use of stock option incentives at state-owned companies.

However, since COSCO updated its stock option program, the company has made aggressive moves. For example, non-executive board members were allowed to claim stock options after serving just one year. Also, the chairman and president were given no limits for stock option entitlements. In addition, selected senior executives enjoyed multiple shareholding-related incentives from several listed subsidiaries.

COSCO worked out a stock option incentive plan as early as 2002. By the end of 2007, the company had awarded its board members a total 38.8 million stock options. Among these, 28.9 million stock options, or 70 percent, had been exercised.

Even after the State-owned Assets Supervision and Administration Commission (SASAC) ordered overseas listed companies to strictly regulate their stock options, COSCO officials showed no sign of slowing their incentive program.

Ji said in a phone interview, “COSCO Investment, as it is listed in Singapore, should abide by local rules and regulations.” He said he did not understand many of the SASAC regulations and was awaiting further explanation from the authority.

As Ji sees it, his contribution to the company over the past five years proves he is entitled to the stock options. “COSCO Investment made miracles in Singapore because our share value grew from less than SG$ 100 million to today’s SG$ 10 billion,” Ji boasted. “Singaporean media call me ‘superstar’ because I created numerous millionaires, even billionaires.”

On April 10, COSCO announced a new contract worth US$ 292 million, but also canceled a separate order worth US$ 202 million. In what seems a coincidence, company CFO Teo Chuan Teck later resigned due to “personal reasons.”

A source with knowledge of the matter said many contract orders that COSCO released were only memorandums that could be canceled without informing the public.

Investors reacted quickly. The company’s stock price slumped 15 percent, posting its biggest loss in company history.

Another controversy stems from the multiple incentives for senior executives. For example, Wei Jiafu, president of the parent company COSCO Group, can benefit from increased stock values tied to at least four listed subsidiaries. This is on top of the stock options he already possesses. In the same boat are company Deputy President Li Jianhong and business department chief Sun Yueying.

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