The Role of Power and Politics in the Repricing of Executive Options

[Timothy G. Pollock, Harald M. Fischer and  James B. Wade, (2002) The Role of Power and Politics in the Repricing of Executive Options, The Academy of Management Journal, 45 (6), 1172-1182]

This paper aims at developing a framework explaining why certain firms reprice options while others do not. The focus of the paper is to explore the moderating role of CEO’s power, the power of external stakeholders and the visibility of the firm and it’s CEO on the primary relationship between negative spread (difference between strike price of stock options and the market price) and the likelihood to reprice options.

Ownership sources of power resulting from concentration of stocks in the hands of both the institutional investors as well as the CEO results in reduced likelihood to reprice options. Institutional investors can mitigate the power of executives either directly or indirectly by virtue of their large shareholding and hence can keep a check on the self-serving behaviour of management. CEO who also owns shares of his company might not undertake activities that have the potential to raise organisational risk of a negative backlash from the shareholders subsequent to options repricing even when such acts may reduce individual risks.

However, the structural source of power enhances the ability of the CEO to engage in option repricing and hence mitigate their losses. CEO who is also the chairman of the company enjoys much greater power to reprice options. When there are barriers to hostile takeovers such that the market loses its effective corporate control and the management has no fear of being ousted, then its ability to engage in unpopular activities rises. His ability to nominate people on the board who are either his loyalist or are dependent on him for board seats can significantly enhance his ability to make these directors function in the interest of the CEO.

But, when the board of directors perceive that their actions to reprice options will be visible and discussed publically then their incentive to reprice options goes down. They are more concerned about impression management rather than serving the interests of the CEO so that they do not lose out on their credibility and legitimacy regarding other claims.

The paper has articulated how the struggle of power, whether its ownership power or structural power between the shareholders and management gets reflected in the decision of the company to reprice options. The party having more power tends to make a decision that is in its own self-interest. The study gives suggestions to use restricted stock awards in place of stock options that gives ownership to the CEO but at the same time preventing him from selling the stock for a stipulated period of time.

[submitted by Anisha, M Phil Scholar, 2017]