April 19, 2007

Purchasing privileges for workers of listed property developers more than just another form of employee benefit

I WRITE to further comment on the case of listed companies offering 'first in line' privileges or discounts to executives - especially senior ones. Some may also argue this is just another form of employee benefit. I would point out significant differences:

1) Options are typically included clearly as terms of employment and tied to certain levels of employee performance.

2) Options are recorded as expenses to the company and are transparent in the Annual Reports.

3) Capital gains are not taxed, but one could argue that any price difference offered to the employee below official launch price counts as income.

Others may argue that this is no different from a company such as an electronics manufacturer offering discounts to its employees, but here again there are several significant differences:

1) Even a relatively big-ticket electronics item such as a plasma TV is unlikely to be significant to the manufacturer's revenues. Each unit of a large property launch, on the other hand, can impact the developer's revenues meaningfully.

Also, there is no guarantee that the electronics manufacturer will be able to sell every single TV it can produce, unlike the case of hotly awaited property launches in 2007.

Hence, at the very least, a developer should first launch all units before offering unsold ones to employees at discounts to avoid what in effect is an award to the employee equal to the price difference the unit can otherwise fetch in the open market.

2) The items purchased are usually for direct consumption - that is, it is not expected that the employee will be able to quickly turn around and sell the plasma TV for a meaningful profit.

There is therefore a strong case to argue that listed companies which tout strong governance should at least offer transparent information on such units offered to employees and 'business associates' - especially those offered at prices lower than the subsequent launch.

Even better, this practice should not be allowed unless expressly endorsed by shareholders, or by a board that has considered the potential loss to shareholders. This last practice is not ideal, as the board endorsing such a policy may be the very one standing to gain from 'first in line' privileges.

Lee Wee Hong (Mdm)