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Free Director Shares
Offering non-cash based incentives for a company's management is a great way to create alignment with shareholders at minimal cost. Yet, when this mechanism is exploited for the benefit of insiders, it can create perverse consequences for unsuspecting shareholders.
Let's look at the risks of this below.
1. Dilution
The biggest risk from giving directors excessive free shares or securities is the dilutionary impact it can have on shareholders. This is because the directors are giving them a part of the company at no cost. As many of these are repeated each year around the annual general meeting, it can mean that over time, shareholders own less and less of the company while directors increase their share count for free annually.
In some cases directors have gone above and beyond in generating shareholder value and deserve an additional incentive. Yet in all cases, we must question what value are exchanging for such dilution.
Amani Gold (ASX:ANL) is a good example of a large tranche of free performance rights being offered to directors/consultants for very little economic shareholder return. In 2021, the company in total offered directors 1.9 billion free performance that later converted to ordinary shares in the company.
In some cases directors have gone above and beyond in generating shareholder value and deserve an additional incentive. Yet in all cases, we must question what value are exchanging for such dilution.
Amani Gold (ASX:ANL) is a good example of a large tranche of free performance rights being offered to directors/consultants for very little economic shareholder return. In 2021, the company in total offered directors 1.9 billion free performance that later converted to ordinary shares in the company.
- November 2021 AGM: 0.9b performance rights (approx. 5% of the company at the time)
- April 2021 GM: 1b performance rights (approx 8% of the company at the time)
As we can see, these issue of performance rights can be heavily dilutive to shareholders especially given that the share price hasn't changed between that period and today (16 July 2023).
Closing considerations
When looking at how a company remunerates their directors, we need to check whether it is proportional to the value they are adding. After all, shareholders often paid their hard earned cash to acquire shares in the business and it'd be unfair if directors received large packages of shares for little value-creation.
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When looking at how a company remunerates their directors, we need to check whether it is proportional to the value they are adding. After all, shareholders often paid their hard earned cash to acquire shares in the business and it'd be unfair if directors received large packages of shares for little value-creation.
Follow our mailing list to see the different threats companies exhibit.
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