When your company proposes issuing shares to directors, here are 3 questions you need to ask

Companies issuing shares to directors inevitably leave shareholders with mixed feelings. On the one hand, directors are getting something essentially for free that they couldn’t get. The other, they are getting further skin in the game and it is less of a cost than paying a bonus. But hang on, don’t shareholders have no say in this? They actually do. Companies have to hold shareholder votes when issuing shares to directors and can only do so if investors sign off.

So, with that in mind, this article has 3 questions shareholders need to ask themselves when considering how to vote when asked to by the company.

 

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When companies go about issuing shares to directors…here’s what to ask

 

1. The dilutionary effect on shareholders

We’ve written in further detail about dilution before and many points in our previous article are still relevant here. In issuing shares to directors, as would be the case regardless of whether they pay or not, existing shareholders get diluted. Granted, the dilution typically won’t be as much as in capital raisings.

But as we noted a few weeks ago in relation to dilution for capital raisings, there is a fine line between a company strategically raising capital for growth as opposed to one that is caught in a never-ending cycle of capital raisings and never going anywhere because they’re not deploying it correctly or just a vehicle to fund management’s personal lifestyles.

In the case of companies issuing shares to directors, there’s a fine line between issuing shares just to save money and giving a further reward directors for a job well done. So, investors need to consider how many shares are being issued and why shares are being proposed to be granted.

 

2. Performance of the management to date

Whatever the reason your company is proposing issuing shares to directors, the performance of management to date needs to be taken into consideration.

If they have been doing a poor job – making dud M&A deals, relying on IR activity alone to drive the share price, failing to make tough decisions in the best interests of the business just to protect their mates, using their position as a mechanism to fund their lifestyles etc. – they don’t deserve to be issued shares, whether they represent a bonus or a substitute for a cash salary.

 

3. The company’s cash position

Is this really a reason given this decision saves the company money. Sometimes, companies propose issuing shares to directors because they don’t have enough cash to pay them. Well, why don’t they have enough cash. This might be because the company is a poor company, it is paying its directors too high, or both. It might be a time to get out of your investment.

Will directors take being paid shares rather than cash as a sign they need to improve their performance and can obtain an even greater pay-out if they do? Or will they just take it as a sign that more of the same is good enough? Maybe if it is the former, you could risk staying in the investment. But even with best efforts, a company is no guarantee to succeed.

Taking all these considerations into account will hopefully help you make the right decision when asked to vote on a proposition involving issuing shares to directors.

 

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