eBay's (NASDAQ:EBAY) annual shareholder meeting takes place on Thursday, and this may be the most interesting gathering in the company's short history. I wish I could be there, but although I know the way to San Jose, my wallet doesn't. (And the meeting's in Orlando, Fla., anyway. Expect to see lots of Disney (NYSE:DIS) collectibles auctioned off after next weekend.)

What has pushed this event onto everyone's radar is the company's effort to pass two controversial proposals. One is especially detrimental to shareholders, and the other -- while probably less important on a practical basis -- is a missed opportunity for management to send a clear message about corporate governance.

The California Public Employees' Retirement System (CalPERS) added fuel to the fire this week (and a lot of publicity) when it came out strongly against management's recommendations. The nation's largest pension fund, CalPERS says it will vote its 212,709 shares against both issues.

Hot options
The proposal getting most of the press is the one to amend the 2001 Equity Incentive Plan in order to increase the number of stock options the company can issue to employees, directors, and consultants. If passed, that number would bump up by 56%, from 25 million to 39 million shares.

(We've talked about the issue of stock options quite a bit in the past, and how they dilute shareholder value. I won't go into detail here, but you can learn more about it in this Tom Jacobs article.)

eBay's option grants last year exceeded 4% of its outstanding shares. We've set forth some rough guidelines where we'd like to see established companies grant no more than 3% of their basic shares outstanding in the form of employee stock options each year, and developing companies 5% or less. I'd certainly place eBay closer to the "established" side of the spectrum than the "developing" side, and thus I feel it's over the limit.

What's more, the company's employees already hold unexercised stock options totaling 12% of outstanding shares. That's already a lot of potential future dilution, so why vote for even more?

eBay says in its proxy statement that it wants to increase the options pool to help retain employees and provide an incentive for them to "exert maximum efforts for our success." But as Jeff Fischer pointed out last month, that's a hard argument to buy when you consider we're talking about an extremely healthy company operating in an economic climate where hundreds of thousands of people have recently lost their jobs. Plus, it's well past its days as a startup operation that needs to issue generous amounts of options in order to attract and retain employees. Instead, why not use some of its $1.5 billion in cash as an incentive?

Auditor independence
The second controversial issue is eBay's request to retain PricewaterhouseCoopers as its auditor. PwC has audited the auctioneer's annual financial statements since its incorporation in 1996. While there have been no problems on that end, there is a question of PwC's independence, since it has also performed consulting duties for eBay.

CalPERS's policy is to oppose any auditors who aren't truly independent, so it will be voting against this proposal as well. On top of that, it will oppose the only member of eBay's audit committee who's up for reelection this year, Dawn Lepore. As spelled out on its website, CalPERS chooses to "actively oppose the election of any director who, while sitting on the company's Audit Committee, approved retaining an external audit firm when that firm also provides consulting or internal audit services to a company."

Lepore is one of three members of the audit committee, and all three are independent. Her committee has concluded that all non-auditing services PwC has performed have been "compatible" with the firm's independence.

Here's the crux of the issue: eBay paid PwC about $1.9 million last year for audit-related services. But it also forked over $110,000 for consulting and other non-audit work. The question is, is PwC being as tough and as thorough as it can in reviewing eBay's books if there's a hundred grand a year extra to be had as long as the relationship stays smooth? eBay admits to the prospect of more non-audit business in its proxy, saying the decision to use PwC for such services in the future would be made by the audit committee or a "designated committee member."

In all honesty, the $100,000 probably doesn't mean much to a giant firm like PwC, and thus it's likely not a big influence on its audit team. And, in eBay's favor, it didn't even have to put this proposal to a vote. Its bylaws allow it to select an auditor without shareholder approval, but management decided to seek it anyway "as a matter of good corporate governance." (However, if the selection of PwC is voted down next week, the Board and the audit committee would "reconsider" its decision -- meaning it could still keep PwC if it wanted.)

But the point is that both companies should want to eliminate any hint of conflicts of interest; that would be the best example of good corporate governance. I admire CalPERS's stance and agree with its decision to vote against the proposal. But I would also be satisfied if eBay management simply came out and said, "There is no possibility we'll use PricewaterhouseCoopers for non-auditing work in the future."

eBay's management generally receives high marks for integrity. There have been bumps along the way, to be sure. CEO Meg Whitman and three other officers were involved in a controversy last year when Goldman Sachs (NYSE:GS) gave executives at several companies the chance to buy hot IPO shares in exchange for lucrative investment-banking business -- a practice known as "spinning." Though apparently legal, Whitman had to have known the conflict of interest would not reflect well on the company. (And neither did being mentioned in the same breath as some of the others involved, such as former Enron Chairman Kenneth Lay and former Tyco (NYSE:TYC) CEO Dennis Kozlowski.)

So, while mostly pleased with management, as a shareholder I'm frustrated that it keeps heading in the wrong direction with respect to stock options. I appreciate CalPERS bringing some much-needed heat to the shareholders' meeting for me.

Rex Moore will write for food... preferably donuts and coffee. Of the companies mentioned in this column, he owns shares of eBay. You can view all his holdings (and deliver donuts) here; The Motley Fool's disclosure policy is here.