A Big Thumbs Up for eBay's Options Plan

Although ISS recommended that shareholders vote down two proposals to increase eBay's options pool last year, investors passed the two proposals overwhelmingly. But with options under greater scrutiny now, the proxy adviser's recommendation may give cover to institutional investors who vote in favor of this year's plan.

Investors opposed to eBay's options practices already faced a tough fight.

One of the obstacles to opposing the options proposal at eBay is that a large portion of the company's stock is still held by company insiders. Pierre Omidyar, the company's founder and chairman, controls 20% of the company's stock. Company CEO Meg Whitman controls more than 2% of eBay's stock. In all, eBay's directors and officers control more than 23% of the company's stock. Additionally, former president Jeff Skoll, who no longer has an active role at the company, owns another 10% of eBay's shares.

Assuming that all those shares are voted in favor of the board's proposal, opponents would have to garner nearly 75% of the remaining shares outstanding to vote down any proposal. It's doubtful that critics would be able to amass that kind of opposition, some analysts say.

eBay shares have risen more than 43% since the beginning of this year, as the company has continuously posted record sales and earnings. Although the company's stock largely stagnated last year, it never saw as much of a selloff as some of its Internet brethren.

The company's stock performance is a powerful disincentive to investors thinking about making a fuss about its options practices, analysts say. "I doubt anyone cares anymore," said one fund manager, who also asked not to be named. "If the stock goes up, people will care less and less. It's all 'What have you for me lately? How much money is in my pocket?'"

And even if individual investors decide to make an issue of the options vote, they aren't likely to get very far without institutional investors. But the mutual funds that hold big stakes in eBay and other prolific options dispensers have been largely silent on the issue, said a second fund manager, who also asked to remain anonymous. "Fidelity, Alliance, Putnam -- you don't see them taking up this issue," said the second fund manager. "They buy the stock because it's going to beat expectations."

A representative for Janus, the institutional holder with the largest stake in eBay, declined to comment, saying that the mutual fund company doesn't disclose its positions on proxy votes. Representatives of American Funds, Vanguard and Van Kampen Investments, which also hold sizable stakes in eBay, didn't return calls seeking comment.

Some opposition to the proposal could be forming, though. The AFL-CIO, whose affiliated unions control pension funds worth some $400 billion, could turn out to be a significant opponent. The umbrella organization for the nation's unions generally opposes options plans at companies where options exceed 10% of outstanding shares and at companies that do not expense options costs. eBay gets strikes on both of those counts.

Through its affiliate unions, the AFL-CIO has pushed a number of shareholder votes involving corporate governance reforms this year, many of which have gained shareholder approval. Among the targets have been companies' options practices.

"The cost of these plans to shareholders" is the AFL-CIO's main reason for opposing them, said Brandon Rees, a research analyst at the organization. "Coming out of the worst bear market since the Great Depression, shareholders are feeling a lot more stingy."

But despite that sentiment, ISS' recommendation could make this fight a losing battle. "It's a noble fight, but like many noble fights, there's no ear to listen to it," the first fund manager said.

>To order reprints of this article, click here: Reprints