A study revealed nearly 2,000 publicly traded companies back dated stock option grants. The widespread cheating cost a few CEO’s their job while a smattering of top executives are due in court for stock fraud. Stock options have been widespread for the last dozen years as company Boards instituted pay for performance. Why did 30% of publicly traded companies cheat by picking the stock’s lowest price of the period for the option grant? It is clear that with no system, there would be no cheating.
A recent AP news report on a court case had this to say about the practice:
U.S. Attorney Michael Garcia said options backdating was not just a benefit for employees who get options. "It does real harm to shareholders who are misled about the earnings of the company."
"It cheats the shareholders," agreed Scott Moritz, a former FBI agent who now runs a Manhattan company which investigates white collar crime. "It takes away value from the company and what was to be distributed to the shareholder."
Which companies and executives are on the hot seat for backdating? Monster, the internet job search company had one executive on trial for such practices. Given the magnitude of the problem, the practice should warrant more than one of two convictions. Unfortunately it may turn out like the prisoner torture cases. A few underlings will be blamed, tried and convicted while the higher ups skate away unscathed.
Be sure to watch pay for performance in education, now in its 4th year. It’s more widely known as No Child Left Behind. President Bush wants to use that same tonic in Medicare. By year 10 will medicine have the same widespread cheating as business under “pay for performance”? Past practice would indicate so…
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