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Backdating

Explore the controversial practice of backdating stock options, its impact on executive compensation, and the changing trends in corporate governance and accounting standards. Learn how influential figures and major companies were involved in the scandal.

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Backdating

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  1. Backdating • Backdating appears to have been a widespread practice in the United States • A company might take the decision to issue at-the-money options on April 30 when the stock price is $50 and then backdate the grant date to April 3 when the stock price is $42 • Why would they do this?

  2. Academic Research Exposed Backdating (See Eric Lie’s web site: www.biz.uiowa.edu/faculty/elie/backdating.htm

  3. Backdating • Proposed by Erik Lie (2005) in his study • dates on which options are granted to executives are chosen with the benefit of hindsight to be past dates when the stock price was particularly low • SEC investigated the issue, big time • Included Jack Welch, GE and Donald Tyson, Tyson Food • Silicon Valley firms (30-40)

  4. Backdating • Lynn Turner, a former SEC chief accountant, suspects it's a fairly common practice and ‘bigger than most people realize.’ Adds a Silicon Valley lawyer who asked not to be named: ‘I’d be surprised if there was even one public tech company that did not employ this practice in those [bubble] years.” • Randall and Erik Lie, 2005

  5. Outlook for ESO • Loopholes still exist • Decreasing trend due to changing accounting requirements • Among the S&P 500 companies, stock option grants dropped 26% in 2005 • Substitutes: Restricted Stocks • In 2005 the S&P 500 companies increased such awards by 44%

  6. Recent trends in executive compensation Figure source: http://www.equilar.com/newsletter/september_2006/ect_sept_2006_article2.html

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