US options scandal

Financial Times ^ | 6/14/06

[pabianice]

If, as some maintain, the practices at Enron were confined to a few bad apples, no such argument is available in the rapidly snowballing revelations about corporate options backdating. To date, more than 40 companies are either under investigation or holding internal inquiries into a practice that potentially defrauded shareholders out of tens of millions of dollars. Either that, or the (mostly new economy) senior executives involved are uncannily brilliant at anticipating sudden and sharp improvements in their company's share price.

The alleged fraud - whether criminal or "constructive", as some class action suits have alleged - was straightforward. Corporate compensation committees retrospectively altered the dates of the original strike price of the option to coincide with the share price's low point in the previous quarter. By using hindsight to alter corporate accounts, the practice drastically boosted the potential windfall to those in receipt of equity options at the expense of shareholders. What are the lessons for US corporate governance?

[pabianice]

This crap has been going-on forever. Twenty years ago at Digital Equipment Corp., each group in field service management was given a block of share options to be distributed by the managers to their best workers. The managers kept all the options for themselves. When employees complained, they were disciplined and/or fired. Of course, DEC went toes-up in 1998, but Bob Palmer, CEO, left Maynard with $53M while 100,000 people lost their jobs. If there is any real scandal, it's that CEO compensation remains a bald-faced racket, utterly disconnected from performance.

[MplsSteve]

Well put.

[l33t]

The racket has become more sophisticated. But surely the "invisible hand" that drives the markets will correct this by itself.

[indthkr]

bump for later.......

[dakine]

"...CEO compensation remains a bald-faced racket, utterly disconnected from performance."


My dream job...oh, wait...

[winner3000]

One of the many reasons CEO's hate Sarbanes-Oxley. Yes, it's got a problem in terms of how expensive it is, but it has limited some of the most egregious fraudulent activities they use to enrich themselves on the back of investors.

[ccmay]

I am totally in favor of capitalist free enterprise with a minimum of governmental interference. However, in the current corporate world, it looks like the hired managers are stealing companies from their owners, the share holders.

I think some regulations to support independent, non-interlocking boards of directors, and other shareholders-rights measures, are in order. I am not in favor of anything that would enrich the pirates of the Bar, however.

The best solution would be if shareholders bothered to learn about the issues and didn't just throw their proxy notices in the trash.

-ccm