 New
CEO disclosure rules won't fix the system
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What do you suppose your broker would say if you placed
an order for 500 shares of ABC stock and stipulated that you'd like
to pay the price that it had traded at back in January, when it
was roughly 40 percent cheaper than it is now? You hasten to explain
that you plan to hold on to the stock for a while, but you just
want to buy it at the lower price to help ensure that you might
reap a nice gain when you do sell.
Well, your request would likely be met with a "Dream
on, bub. Wouldn't it be nice if we could all do that?"
But if you were the top executive of a company, you might've been able to get stock options that were backdated to a time when your company stock was languishing. This would have immediately given the options higher potential value, even
if you couldn't exercise them right away.
A quick lesson
Stock
options give employees the right to buy company stock at a future
date at the exercise price, which is supposed to be the price of
company shares at the time the options are granted. Recipients of
options usually have to wait a year or longer for the options to
vest. After they're vested, these options can be cashed out if the
shares are trading above the exercise price. You get the difference
between the exercise price and the market price on the day you exercise
the options. And you don't have to lay out any money to exercise
them unless you plan to hold the stock before selling.
Stock options are given by the truckload to top executives, supposedly because they help align the interests of the top
brass with those of shareholders. If the company does well and the stock price goes up, everyone benefits, so the thinking goes. And if
the company does poorly, the stock options expire worthless, and no one wins.
But if company managements can get stock options that are backdated to a time when the stock was trading at a lower price, their options suddenly have more value.
The backdating practice has been called everything
from "innocuous" to "corporate looting." I think it smacks of unfairness.
But it seems to have been a common practice at many companies. Some
80 firms are under investigation by the Securities and Exchange
Commission in the backdating scandal that was originally uncovered
by The Wall Street Journal in March. The number of firms under scrutiny
seems to grow daily. And recently the IRS announced it's looking
into the matter, too.
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