A Share is a Share, Until it's Not a Share
May 07, 2015
As I write today's blog, I realize the title may have already created confusion. "A Share is a Share, Until it's Not a Share?" Huh? No, it's not an attempt to be cryptic. Let me explain. I've recently blogged about some recent (and very public) errors in tracking share limitations within stock plans. Those situations were a good reminder about the need to track and audit the various ways that we limit, distribute, account for, book, and log shares across the various aspects of equity compensation and financial reporting. In fact, I've become so passionate about the need to track and reconcile shares that it was the subject of my Administrator's Corner article (Keeping Track of Plan Limits - Mar-Apr 2015) in the most recent edition of The Advisor newsletter. In thinking through this topic on a more global level, it's become apparent that tracking shares across equity compensation is not always as simple as it seems, because not all shares are counted or recorded equally across the board. I'm going to dive lightly into the "irreconcilability" of some of these areas in today's blog.
Get it From the Source
Before we move on, I need to share that next week's NASPP webcast, Irreconcilable Differences (May 13, 2015 from 4:00pm - 5:30pm ET), is the inspiration for this content. That webcast will examine the counting of shares at a much deeper level than I can do now. A short preview of the webcast is available in the latest episode of our Equity Expert podcast series, in my interview with panelist John Hammond of bendystraw.
How Can a Share Not be a Share?
There are so many areas where shares get recorded in their life cycle. Or not recorded. Keeping track can involve many spreadsheets, reports, third party systems, and manual effort.
One example John covered in the preview podcast was a restricted stock award (RSA) that is issued at grant and recorded on the books of the transfer agent. Although technically issued at grant, the shares underlying the RSA need to be reversed out of the transfer agent's report that reflects weighted shares outstanding before that figure is used to perform EPS calculations. This takes careful attention and often manual intervention when receiving figures from the company's transfer agent, prior to delivering those handling financial reporting. John's advice is that companies reconcile their shares outstanding figures to the transfer agent's records regularly to get ahead of any share counting differences.
Another area where issuers need to pay careful attention is in managing some of the life cycle "events" and how those events impact share counts. For example, when someone terminates and shares are forfeited, what happens to those shares? What about when a stock option expires? Are they recycled back to the plan? Do they return to treasury shares? What is the path for those shares upon forfeiture or expiration? And, if there is a fungible or flexible share ratio in effect, the stock plan administrator needs to ensure that the ratio is considered in returning shares to the plan (if and when that occurs).
I've only been able to bring up a couple of areas where share counting and reconciling matters. If this strikes a chord with you, you'll want to hear more from the experts in next week's webcast.