James Fanto on Stock Option Backdating & Its Implications for Firm Governance

James Fanto on Stock Option Backdating & Its Implications for Firm Governance

Recent stock option backdating scandals, where an employee stock option recipient obtains an immediate return that he or she has not earned thanks to falsified corporate books and records, have received considerable legal attention lately. Professor James Fanto of Brooklyn Law School discusses option backdating and other stock option manipulations and the federal securities laws that apply. He argues that compensation committees should follow more robust practices when granting employee options. This includes setting regular dates for option grants and conducting a formal and immediately documented meeting whenever a committee approves option grants. Professor Fanto writes:

Even if backdating is a scandal of the past, it provides lessons about governance in large public firms and particularly on the appropriate conduct of a board com-pensation committee in order to avoid similar problems in the future. Clearly, the practices and operation of many compensation committees were far too informal in the awarding of executive and employee stock options, which made them easily subject to manipulation by senior executives and others.

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