Backdating Stock Options: Intentional Fraud or Carelessness?

Just as everyone involved with executive compensation matters was settling in to address the impact of the new accounting rules under FAS 123R, the requirements of the stock exchanges, the deferred compensation rules under Internal Revenue Code (IRC) section 409A, the new Securities Exchange Commission’s (SEC) proxy rules and the proper balance between adequate executive compensation and good governance, a new jolt came into play in the executive compensation arena. Studies emerged indicating that many companies consistently issued stock options at the lowest price during a period of time.

This immediately propelled the government and the media to review and question many companies’ stock option granting practices and prompted many companies to review such procedures. The result to date has been a surprising — and disappointing — revelation of intentional backdating in certain instances, a recognition that grant procedures have been sloppy in even more instances and that timing of option grants is an issue that, especially from the governance aspect, needs greater consideration.