How The Backdating Virus Spread

from the memetracking dept

With so many options backdating stories coming to light, one might be tempted to ask how all of these different companies all came upon the same scheme at around the same time. A new study cites as one of the causal factors, a high level of inbreeding among corporate boards. In other words, of the companies that have been implicated in the scandal, many of them have shared board members with each other, suggesting that the idea to backdate options as a compensation mechanism may have spread via word of mouth from company to company. Companies like to get impressive names on their boards, people who are executives and directors elsewhere. But if the study is true, then this would seem to come at a cost. Of course, there could be a more benign explanation: a lot of the companies involved are in tech, so it makes sense that there would be many shared directors among them. Still, the idea that a rotten apple, so to speak, could cause problems at multiple companies isn't hard to believe. Investment Dealers' Digest has an interesting report on one director who serves on the boards of three companies, each of which is now drawing the wrath of corporate governance experts. What's funny is that those have sought to reform boardrooms have pushed hard for the inclusion of more independent, outside directors on company boards. This sounds nice, but if it means those directors are importing bad ideas from other companies, it really can backfire.

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  • identicon
    rishi, 19 Oct 2006 @ 12:14pm

    My view on this is that backdating spread because of the competetion among the tech companies to pay their employees higher and higher compensation. Backdating increased the earnings from options and hence increased the total compensation.

    reply to this | link to this | view in chronology ]

    • identicon
      legal begal, 23 Oct 2006 @ 11:58am

      Re:

      Falsifying documents that have a direct impact on accounting for stock options, and thus the finacials, is a deliberate attempt to deceive the investor. I don't care how you cut it, that is just plain unethical and wrong.

      We have seen where HR departments falsified documents having a direct accounting affect. That unethical behavior has a tendancy to permeate an organization.

      reply to this | link to this | view in chronology ]

  • identicon
    Patrick Mullen, 19 Oct 2006 @ 1:35pm

    Backdating is not a minor offense or a technicality. It is manipulating the market, and the SEC and the Justice Department frowns on that. We have seen departures, but coming next is litigation and trials. You will see people go to jail over this issue. You will see fines being levied on companies. You will see class action lawsuits being filed over this.

    Why have some industries seemed to be over represented in this scandal? Why have financial services companies seemed to avoid this issue? One answer is that financial services executives are much more careful about perceptions, one of the first thing they look at when evaluating issues like backdating is "how will it affect shareholders? Is it fair for all stockholders?" You have seen executives in other industries, most recently in the healthcare space, tarnished by this, and you will see worse things happen to them in the coming days, weeks and months, but the fact is that they were unprepared to handle the regulations that are required, they were ignorant of what you can and can't do from a SEC point of view. They didn't have the right experts telling them what they shouldn't be doing (much like the HP scandal.)

    reply to this | link to this | view in chronology ]

  • identicon
    The Original Just Me, 19 Oct 2006 @ 2:35pm

    Re: Patrick Mullen

    Well stated, bravo.

    reply to this | link to this | view in chronology ]

  • identicon
    Gary Murray, 20 Oct 2006 @ 10:09am

    Forget about bailing - send off the flare!

    What you are witness to is but a spash of water over the transom. Prepare for a tsunami of companies reeling from this issue in the next 6-12 months.

    This was not an aberration of sinister board members but a common practice among many tech stocks over the last 7-10 years. Lack of tight internal controls on how to grant options and no clear SEC ruling on the matter exacerbated the practice.
    Eventually all public companies renewing their Directors and Officers Insurance policies will be asked very direct questions about their knowledge and policies surrounding stock option grants. There will be no where to hide. Restatements, executive level resignations and de-listings will become so prevelant that it will be considered just another tech space badge of courage.

    reply to this | link to this | view in chronology ]


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