Comment on upcoming board option grantsWe're coming up to the point where, traditionally, options are granted to all directors. The grants have been in May for the past few years, roughly coinciding with the AGM (though in 2022 the AGM was in April, the better part of a month earlier).
It seems to me there are a number of unusual issues relating to this year's option grant that I think should get some attention.
Let me say first off that this is not some kind of attack on the Quarterhill board. I'm perfectly comfortable with the thought that all five nominees are people of good character. There's no shareholder motion coming. (I also recently voted for all five nominees.)
That said, if there is a company turnaround happening (and I'm inclined to think there is) then we have here a classic instance of directors potentially being able to benefit from their own mistakes.
I've seen it before. Board makes governance errors. Stock gets hammered. Following traditional practice, board options are awarded with an exercise price the same as the current (depressed) market price. Stock eventually goes back up.
But let me add a little more context here. I don't know all the details of the board option plan--and I don't really want to spend all day learning--but the size of grants over the past few years appears to indicate that as (a) the exercise price gets lower then (b) the number of options granted to each director increases. So here's for the past four years (year, granted per director, exercise price):
2019 56,818 $1.76
2020 50,251 $1.99
2021 41,841 $2.39
2022 46,728 $2.14
If you follow that pattern and the stock stays at the current $1.31 it would appear the directors would be getting something in the neighbourhood of 70,000 options each. So they would be getting a double benefit--a lower exercise price AND far more options. Could anyone argue that this would be a reasonable outcome at the end of a year when the current chair, Mr. Gillberry (in the Q4 CC), seemed to pretty much admit that the board has made significant missteps?
Now the formula may not work quite that way. And I'm fine to be corrected. But it's reasonable for shareholders to be concerned about this.
A simple solution would be for board members to (voluntarily) either reduce the number of options granted or set an exercise price somewhat higher than the current market price. I've seen it done before by boards that I admire.
If the alleged missteps had not happened then where would the stock be today? No way to know. But it's perhaps worth noting that the stock was recently at $1.95 (when the market didn't know that Bret Kidd would soon be exiting or that Q4 results would be, shall we say, not pretty).
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There's another point that should be considered. For every year that I've looked, the option grants are the same for all directors. Reasonable enough, one might suppose. Note the contrast, however, with the way executive bonuses have been doled out. In 2022 especially. The percentages of target bonus awarded to executives ranged all the way from 92% to 0%.
As it should be, I'd say. Results-based.
So what does this have to do with the board? If we could say that the board misjudged in promoting Bret Kidd to the role of CEO, well, 3 of the 5 nominees participated in that decision and 2 of them did not. Pamela Steer and Rusty Lewis joined the board in 2022, AFTER Mr. Kidd was promoted. They also joined after the key moments in the Viziya debacle. And if we can say that Quarterhill overpaid for ETC, well, Ms. Steer and Mr. Lewis joined after that decision also.
I realize this is an uncomfortable issue to raise. That said, if executive %-of-target bonuses are going to be unequal (and results-based) is it so outrageous that board option grants would be also?
I'm fine to let the board members figure this one out for themselves. But the point should be made. There is a logic to Ms.Steer and Mr. Lewis getting a larger option grant (and/or lower exercise price) than the others.