Henry C. Blackiston on Compliance, Executive Compensation, and Option Dating

Henry C. Blackiston on Compliance, Executive Compensation, and Option Dating

More than 90 companies have been investigated by federal prosecutors, regulators, or independent board committees for backdating stock option grants. This Commentary expands the discussion by renowned expert Henry C. Blackiston contained in chapter 34, Executive Compensation, in Corporate Compliance Practice Guide: The Next Generation of Compliance (Basri 2009). He writes:
 
     One aspect of compliance in the executive compensation area that is crucially important is the timing of stock option grants. A failure to use diligence in this area can result in disastrous consequences such as material misstatements in the disclosed value of equity awards that may lead to shareholder suits, a need to restate earnings, and penalties under section 409A of the IRS Code. In addition, intentional misdating of option grants can result in criminal penalties, and in fact, such penalties have been imposed in the past--for example, in the case of the Chief Operating Officer of Monster Worldwide Inc., where intentional backdating of options resulted in improper accounting.
Option Backdating is pretending (documenting) that an option was granted on a date before the grant was awarded. So, in a rising market, the exercise price on the stated grant date is lower than the fair market value of the stock on the actual later grant date, giving the optionee an artificial gain as of the actual grant date. If done intentionally, the action is clearly illegal and can carry criminal penalties. If done unintentionally (more likely after the passage of Sarbanes-Oxley in 2002 or in circumstances where fair value is reported based on the date of board or committee action rather than the subsequent date on which an award is communicated to a grantee as described above) there are still dire consequences.
Since the timing of option grants is critical for a corporate compliance standpoint, in view of the rules descried above, the following are suggested best practices to insure there are no grants that result in unnecessary exposure by the Company to litigation by shareholders or others …
 
 
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