What’s becoming increasingly apparent as more and more companies reveal the results of internal investigations into the timing of stock options grants to executives, is that there’s really no cut and dry, right or wrong, when it comes to the practice.According to published reports and independent research groups, upwards of 130 publicly traded companies have announced that they are looking into their own options-granting practices -- and the actual number is surely much, much higher than that. But with many of those investigations wrapping up, what comes now?
Within the last 24 hours, a trio of executives -- including KLA-Tencor chairman and founder Kenneth Levy, Sapient Corp. chief executive and founder Jerry Greenberg and UnitedHealth Corp. chief executive James McGuire -- all resigned in the wake of their companies’ investigations into options granting. Last week, it was the heads of two technology companies leaving over options investigations -- CNET Networks Inc. said that its co-founder and chief executive Shelby Bonnie had resigned, while McAfee Inc. fired president Kevin Weiss and said that chief executive and chairman George Samenuk would retire after an investigation found accounting problems that will require financial restatements.
Two weeks ago, Apple Computer Inc. chief executive Steve Jobs issued an apology to shareholders, saying that while he knew about the company’s practice of backdating stock options awarded to executives, but wasn’t aware of the full accounting implications. That announcement came after a three-month internal investigation that resulted in the resignation of former chief financial officer Fred Anderson from Apple’s board of directors.
As a basic review of the practice, a stock option is meant to allow a company’s employee to buy a share of the company stock at a predetermined price -- usually the market price at the time of issue -- and then sell the stock in the future, when and if the stock is worth more. The cost to shareholders is that their own stock is worth a bit less because the newly issued shares dilute their stake.
The hubbub is over that fact that as more details come to light, it appears that executives have routinely been setting strike prices on dates when the shares hit temporary lows -- rather than the dates on which the options were issued, which is what most people assumed. The iconic Jobs was safe because he himself didn’t benefit from the practice, but Apple’s announcement made it clear that the practice of issuing options at their low point isn’t an outrageous practice in corporate circles.
More guidance is needed to move the issue of options timing from a gray area to a black and white one. And I’m sure it will come (the Securities and Exchange Commission’s chief accountant has already issued a letter under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"). But for all of the noise around options granting, at the end of the day, the controversy comes down to companies and executives trying to protect themselves from paying any more than they have to, to the federal government. That those executives will do so at the expense of shareholders, well, five years after Enron and WorldCom, you’ll have to excuse me for feigning any surprise.
