Backdating – Now It’s The Directors’ Turn

New front in US backdating scandal
By Francesco Guerrera in New York
Published: December 17 2006 22:03 Last updated: December 17 2006 22:03

“More than 1,000 directors of US companies have benefited from backdating stock options to boost their pay, according to new research that is set to open another front in a scandal that is spreading rapidly across corporate America.
The study by three academics – to be published on Monday – is the first to provide evidence that options of outside directors were backdated in the same way as the ones awarded to chief executives. It could prompt regulators and companies to widen their probes to include backdating by directors.
…The study found that directors’ backdated options were more likely to have occurred when executives also got a grant on the same date. Backdated grants were spread across most industry sectors but tended to be more prominent among companies without a majority of independent directors, according to the research.”

All I can say is , “Duh!” The regulators, external auditors, general counsels, and internal auditors are asleep at the wheel if they thought the benefit was limited to C-level corporate executives. It is interesting to observe that this data and this phenomenon is being brought to light by academics. The ones charged to monitor and attest to compliance with laws and regulations and good ethical practices did not raise their hands. It is obvious that too many stood to lose by calling out this abusive practice.

The news was also filled this past weekend with articles about record profits and bonuses paid in the financial services sector. There was news of bankrupt companies like Delphi receiving investment from equity groups while at the same time planning to cut thousands of workers and close plants. Interestingly, the Financial Times also had a feature this past weekend on the disappearance of upward mobility from the middle class.

How can anyone talk of diluting Sarbanes-Oxley or any other law or regulation intended to improve corporate accountability for financial information? There are still abuses not being identified and addressed by those with the responsibility to keep watch, even with the new laws. And there are corporate executives, directors and other service providers looking for loopholes in the laws and new schemes rather than being deterred from continuing to abuse stakeholder trust.