The scene is set. Thousands of baying shareholders will be looking for the blood of Eircom's chief executive, Mr Alfie Kane, and his co-directors at Wednesday's a.g.m. Their offence? The company's share price has collapsed by 35 per cent to €2.55 from an issue price of €3.90. It is now proposing an option scheme so that up to 400 managers can benefit from this weakness.
Is this emotional hype justified? And should shareholders vote for or against the share scheme proposals at the meeting? Apart from the sticky issue of the share option scheme, another matter sticks out like a sore thumb. Resolution 3 - subsections A to C - calls for the re-election to Eircom's board of Mr Kane, Mr Marten Pieters of the Dutch group KPN, and Ms Annike Christiansson, of the Swedish firm Telia. Although Mr Kane was previously the most senior executive at Telecom Eireann, he has been at the helm of the publicly quoted company for only a year. During that time its profit before tax and exceptional times rose 17.8 per cent to €337 million, according to the figures selected by the group's chairman, Mr Ray MacSharry. Those figures are, of course, correct. But if the exceptional charges and redundancy and transformation costs (before the operating profit line) are taken into account, there was no growth. On the same basis, but using only the ongoing business, then the underlying growth amounted to 11.3 per cent, or well below the growth figure used by Mr MacSharry. Shareholders will have to ask themselves if that performance justified the total remuneration package of £1.7 million paid to Mr Kane and the group's finance director, Mr Malcolm Fallen.
Eircom is, of course, struggling to come out of the semi-State mould. Keen to retain its customer base and move into newer IT businesses, it is very much marketing-focused. Indeed, the group has not been afraid to take on the big players - it bidfor the new generation mobile phone licences in Britain before withdrawing over the high cost. However, it has come under intense criticism over its service to customers, which urgently needs to be addressed.
KPN plans to sell its 21 per cent stake shortly and Telia's 14 per cent stake is expected to be sold early next year. Shareholders should vote against their continued representation on Eircom's board for two reasons.
First, KPN and Telia were brought in as strategic partners but there is no evidence that their presence has been of any benefit to Eircom. Indeed, Telia denied an Eircom statement which said it had agreed to sell its stake in a secondary offering with KPN. Surely that is not a stance to be adopted by a strategic partner.
Telia has had plenty of rows before. The company bickered with the Norwegian group Telenor, its proposed merger partner, about management control. And Mr Tormod Hermansen, the Norwegian proposed as chief executive of Telia/Telenor, became a target of an overt Swedish campaign to unseat him. It is worth recalling that the abuse was personal; he was attacked for his cheap suits, his unpolished shoes, his unfashionable glasses and his moustache!
Second, KPN and Telia should not be part of board decisions because they intend selling their stakes.
Regrettably, a vote to unseat them could be a short victory. Comsource, the company that holds the KPN and Telia shareholdings, is entitled to three directors - the other is Mr Patrick Morley whose re-election is not for consideration - under the articles of association.
Nevertheless, a rejection of the re-election motions, on a show of hands, would demonstrate a desire not to rubber stamp the group's proposals willy-nilly.
The question of options has been well-aired. And, of course, company boards cannot be held responsible for the changed market sentiment.
However, it should be asked if Mr Kane's unfortunate remark in an RTE interview last May contributed in any way to the share price's subsequent demise? At a time when the share was under siege, he said the Government and its advisers had set the flotation price too high. What timing! As one of the principals in the flotation, surely he should have uttered those words at the time of issue.
There is no suggestion that the statement was designed to push the shares lower so that the cost of exercising the options would be lower. Nor is there any suggestion that Eircom is holding up a flotation of part of its activities until after the options are in place.
No-one would deny that options should be in place to provide the management with plenty of incentive to get the group moving. However, the timing is wrong. The plan comes a year after investors have seen the value of their holdings fall by 35 per cent, after Mr Kane's share remark, and at a time when KPN and Telia are selling their shares.
Also, it is worth emphasising that options are taken up at a nominal amount - say £1 - when there is virtually no monetary layout, and are exercised, at the option of the executive, over a period at a price set by the group's remuneration committee.
Ironically, had the share option scheme been introduced at the time of the flotation - the Minister for Public Enterprise, Ms O'Rourke, was opposed to this - the price would have been set around the issue rate. There would now be a very disillusioned management team but they would be merely sharing the plight of the ordinary shareholders.
Timing aside, the proposed option scheme appears fair enough. It would only become operational if the company's earnings per share increased in line with the increase in the consumer price index, plus 5 per cent compound. If corporate and institutional shareholders adopt their traditional roles, as is likely, the resolutions will be passed. The scheme's terms were changed following representation from the institutions.
But considering the outcry, Eircom should seriously consider postponing the option plan in resolution 6 and the longterm incentive plan in resolution 7. Otherwise, shareholders should vote against the proposals, with the proviso that they could be reconsidered in a years time.
