Options grants must be addressed

Executive compensation has long been bandied about in media circles and the chattering class. Whether it's a story about compensation increasing while revenues decrease, or simply talk that top-tier executives are in the business of naked wealth creation for themselves, executive compensation is not a theme for which most corporations are seeking speaking opportunities.

Executive compensation has long been bandied about in media circles and the chattering class. Whether it's a story about compensation increasing while revenues decrease, or simply talk that top-tier executives are in the business of naked wealth creation for themselves, executive compensation is not a theme for which most corporations are seeking speaking opportunities.

Impact on goodwill equity and basic corporate reputation is implicated by the manner in which executive compensation is presented for public consumption. Historically, this task has not been handled adroitly, which is unfortunate. And now the stakes are as high as ever.

The Wall Street Journal's recent coverage of a University of Iowa study on stock options backdating initiated scrutiny into an offshoot of executive compensation that strikes at very the heart of corporate credibility. The Securities and Exchange Commission and other regulatory agencies have launched more than 100 investigations against companies by based on evidence that they granted stock options to top-level executives and directors after a precipitous incline in share value, but then recorded the options grant date before the appreciation in stock value.

While lawyers and others contend that backdating is not illegal on its face or may be just unintentional sloppy plan administration, perceptually it's a difficult tonic to swallow. For the most part, shareholders, financial media, and others view it as betting on a horse race today that was run yesterday.

Reputation and credibility begin and end on the top floor when the news is bad, and, unfortunately, the takeaway for many is that options backdating proves that the C-suite is a private poker game in which self-dealing and politburo behavior are the norm. While this is an unfair characterization of the majority of American companies, perception is Ÿber alles, of course.

And despite meaningful action on corporate governance reform, a new dialogue must be deployed focused on options grants to executives both as a fundamental corporate reputation imperative and as a risk-management necessity.

The remedy is difficult, but a potential reputational life preserver. Self-policing and self-reporting are the ticket. The Department of Justice, the SEC, and, recently, the IRS have all suggested that qualified amnesty will be afforded to companies that step up and take responsibility by bringing matters to their attention.

The more salient benefit reputationally is that stakeholders tend to be forgiving when presented with an open, sincere admission of bad behavior coupled with a demonstrated resolve to right the road.

The good news is that the fundamental steps to building greater trust on the issue of options grants to senior executives and directors are not particularly ethereal and include: establishing and promoting clear policies and procedures governing options administration, developing a comprehensive plan that fully explains the safeguards and detection systems that will prevent infractions on options grants, creating bright-line remedial steps the company will take if there is a breakdown in the options administration plan, and, most important, making an open and notorious declaration that anyone harmed by infirmities in options governance will be compensated fairly and expeditiously. That should get everyone's attention.

Harlan Loeb is head of Financial Dynamics' litigation practice and member of the adjunct faculty at Northwestern Law School

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Register
Already registered?
Sign in

Would you like to post a comment?

Please Sign in or register.