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Study: More Companies Backdating Stock Options
The number of companies in a recent analysis that apparently backdated stock options to bolster executive pay packages surprised the study's authors and experts alike. Some actions may be attributable to poor bookkeeping rather than intent, says one expert.
According to a new study, more than 2,000 companies have used backdated stock options to beef up the pay packages of top executives. The analysis that examined 39,888 stock-option grants dated from Jan. 1, 1996 to Dec. 1, 2005 and offered to top executives at 7,774 companies suggests the practice is much more common that previously disclosed. The study revealed that 29 percent of the companies studied have used backdated options, and 14 percent of options granted to top execs in that time were backdated or otherwise manipulated to make the options more lucrative. The findings of the study, conducted by Erik Lie, an associate professor of finance at the Tippie College of Business at the University of Iowa, and Randall A. Heron, of the Kelley School of Business at Indiana University, caught both the study's authors and experts off guard. "It is pretty scary, and it's quite surprising to see," Lie told The New York Times. In the same Times piece, Lie said the findings were so unexpected that he asked colleagues to check the figures. The consensus he and his associates reached was that the numbers most likely erred on the low side. Some experts, however, believe the practice may not be as widespread as Lie and Heron's research would indicate -- nor do the findings necessarily reflect a lack of responsibility on the part of many of the companies studied, they say. Irv Becker, director of the Philadelphia-based Hay Group's executive-compensation consulting practice, says the aforementioned numbers "seem high," and the number of firms that willingly acted inappropriately is most likely even lower. In any event, the study's findings come as the federal government has ratcheted up its investigation into the practice of timing options to the stock market. To date, about 60 companies have disclosed they are either targets of government investigations, the subject of investor lawsuits or conducting internal audits regarding the practice. There may be more to come, Becker says. While Becker feels the practice of backdating stock options is "limited in scope," he does foresee more companies coming under federal scrutiny. "I do think that there will be more companies that will wind up being included in the investigation," he says. But, the number of firms ultimately found to have backdated options will likely be closer to 100 or 150 than 2,000, he says. Myrna Hellerman, senior vice president of Sibson Consulting, a New York-headquartered HR, employee benefits and compensation consultancy, doesn't necessarily dispute the study's findings. But, what is more important to consider, she says, especially in terms of potential consequences facing companies found to have backdated stock options, is determining whether they acted in a "malicious" manner when doing so. While Hellerman agrees that some organizations probably knowingly manipulated the dates on which executives were conferred stock options to increase their worth, "I think many companies were simply too loosey-goosey" in how they handled the granting of stock options, she says. In many cases, she says, firms may have lacked the proper controls and policies, or well-governed boards and/or compensation committees to predetermine specific dates to grant stock options to executives. Still, she says, "I think it's inexcusable, and common sense would say it's wrong." "But," she continues, "it happened, and hopefully that will cause other organizations to do their own self-audits" regarding the practice. And as the federal inquiry intensifies, she anticipates more firms will do just that. She also predicts that still more companies will step up and admit to engaging in the practice in the past -- but to ensure they are now and will continue to be in compliance with Sarbanes-Oxley, Securities Exchange Commission and other regulations in the future. "It's a number that's going to increase," she says. "But," she adds, "[the total] may increase because of companies coming forward saying, 'Yes, we did this, but it was an honest mistake."
July 21, 2006 Copyright 2006© LRP Publications |
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