Encashing the ESOP - another stark reminder from the recent Satyam episode.

We all know about the Satyam scandal and the various efforts made by the Government in salvaging whatever possible for the various stakeholders from this unprecedented fiasco. At this juncture, we have to remember the employee millionaires of Satyam who had made tremendous wealth (of course on paper) through ESOP's. The employees who were holding ESOP's were one of the worst affected of the lot due to steep correction in share values of Satyam. We cautioned in one of our earlier articles when Bear Stearns went down in March 2008 about the need to systematically encash ESOP's to avoid situations like this. You can read that article here.

The Satyam episode once again reinforces the need for encashing the ESOP's on a periodic basis. One of the most commonly faced phenomenon with regard to employee shareholders of the company is that they continue to hold on to their ESOP's thinking that their company is strong and nothing would happen to their company. We have past examples of Bear Stearns, Lehman Brothers, I2 Technologies from USA where employee shareholders held sizeable portion of the equity and finally they were the one who were left in the lurch. Bear Stearns shares were exchanged by JP Morgan at USD2 per share. Lehman Brothers is currently engaged in Bankruptcy proceedings and we dont know the fate of the share price. I2 Technologies had fabulous prices during the early years of 2000 and now quoting nowhere near its all time high prices.

None of the employee of Satyam would have imagined prior to 07 Jan 2009 that their top management is doing all sorts of corporate frauds. Leave alone the employees, the stock analysts who were following the Satyam stock for number of years had any clue on what is happening in the company. So how we can blame the novice employee shareholders. They in most cases neither have the time nor the skills to evaluate their own company financials and exit at the right price. But that should not mean that they should continue to hold all their ESOP's without doing anything.

What the employees can do to mitigate the "Black Swan" events?

They would have never thought that their share prices would plumment more than 80% of the value in the next 3 days or so.

The employees should practice systematic encashment of ESOP and convert them into different classes of assets. Instead of holding shares of their own company, they can spread the risk by investing in Fixed deposits, real estate or even shares of their competitors or in equity of other companies. This would help them to tide over this unexpected black swan events better rather than just lament about their loss of wealth.

We once again advise all employee shareholders who hold massive amounts of ESOP shares to convert at least partially into other asset classes or move into equities of other companies other than their own company. Lets be better prepared to meet these corporate events rather than react to them.