Page 141 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 127

Price Per Share Expiration Date
Current Future January March June

$100 $90 $10 $12 $15
100 95 6 8 10

100 100 4 6 8
100 105 2 4 6

100 110 1 2 3
Table 4-9. Market options

A warrant is similar to a call option in that it is the right to buy a stated number of shares
of common stock of the company at a prescribed price over a specified time period. They
typically are packaged with bonds or preferred stock sold by the company and enable the
investor an opportunity to participate in an increase in the value of the common stock.
Investors are typically identified as either bulls or bears. A bull expects the price of a stock
(or specified grouping of stocks) to rise in the future and therefore buys stock now.
Conversely, a bear is a person who believes the stock price will fall and therefore will sell the
stock now, expecting to be able to buy it later at a reduced price. A bull would purchase call
options to purchase higher-priced stock in the future at today’s prices; a bear would purchase
put options to sell lower-priced stock in the future at today’s price. An upward movement in
stock prices (typically 20 percent over a year) across a significant portion of the stock market
is called a bull market; conversely, a broad-gauge decline (of 20 percent or more) in stock
prices is called a bear market.
The principle of publicly held corporations is that shareholders elect individuals to the
board of directors to represent them. Actually, shareholders have three ways to influence
companies. They can vote their representation onto the board (thereby voting off the
board those they do not want). Secondly, they can introduce and/or vote for resolutions
limiting management discretion. And most of all, they either buy or sell the stock based
on whether or not they support the management. In the next section (“Rulemakers”), we’ll
be looking at an organization focused on protecting shareholders, the Securities and
Exchange Commission.

Shareholder Watchdogs

In addition, several watchdog organizations give their opinion on the appropriateness of
management proposals to be voted on by shareholders. Among the retirement funds, probably
the best known is CALPERS (California Public Employees Retirement System) and TIAA-
CREF (Teachers Insurance Annuity Association–College Retirement Equities Fund). Two
other well-known groups are the Council of Institutional Investors and the Institutional Shareholder
Services. Additionally, there are several individuals who assume this responsibility, buying a few
shares in many organizations to broaden their impact.
Because there is a significant difference between using the plan-approved number of
shares for stock awards vs. for stock options, it is not surprising that some institutions require