BUSINESS

Scandal or bore?

COLIN CAMPBELL December 18 2006
BUSINESS

Scandal or bore?

COLIN CAMPBELL December 18 2006

Scandal or bore?

BUSINESS

Over 130 companies are being investigated for stock option abuses, but no one seems to care

COLIN CAMPBELL

When Research in Motion Ltd. announced in late September it was launching an internal probe into the way company stock options were granted to insiders, it hardly registered among analysts and investors. Last month, when word emerged that both the U.S. Securities Exchange Commission and the Ontario Securities Commission were also investigating, it still didn’t ruffle many feathers—between late September and late November, RIM stock rose from around $100 per share to $160. And when major newspapers last week raised questions about the curiously fortuitous timing of option grants to RIM’s founders in recent years, that didn’t spark a sell-off either. If options shenanigans at RIM are for real, nobody seems too concerned about it.

At this point, the investigations at RIM haven’t produced any substantive allegations of wrongdoing. But across the U.S., the backdating of option grants—an intentional manipulation meant to inflate their value—has touched nearly 200 companies and cost dozens of executives their jobs. And yet, despite the stunning breadth of the abuses, the issue hasn’t generated nearly the same sort of public frenzy that surrounded earlier cases of corporate malfeasance, like Enron, Worldcorn and Tyco, to name a few. “There almost

seems to be a bit of malaise in the public, like ‘here we go again,’ ” says Richard Powers, assistant dean at the University of Toronto’s Rotman School of Management. Hardly what you’d expect from what may be the biggest corporate scandal of all time.

That may have something to do with the nature of the transgression, which centres on the way employees, usually top executives, altered the timing of option grants to coincide with low points in their company’s stock

BACKDATING OPTIONS BECAME SO COMMON ‘NO ONE THOUGHT THAT THERE WAS ANYTHING WRONG5

price. By cherry-picking a past date on which to peg their options, they could vastly increase their value. Such options became not so much an incentive for executives as a cash grab, one that cost companies and shareholders billions of dollars.

While a major breach of trust, the practice became so widespread that it was deemed largely acceptable, says Peter Henning, a law professor at Wayne State University and a former SEC attorney. “It had come to be

viewed as common practice, no one thought that there was anything wrong.” Backdating became especially popular during the tech boom of the late 1990s when companies couldn’t entice top employees with big cash, but did have fast-growing stocks. Backdating has since been uncovered at all kinds of companies, from UnitedHealth and KB Home to Apple Computer and Barnes & Noble. In fact, the scandal is probably 10 times bigger than anyone thinks, says Erik Lie, a finance professor at the University of Iowa whose research first brought the issue to public attention. About 30 per cent of all public companies in the United States have done at least some illegal backdating, he says.

Lie says the scandal has been somewhat diluted by the fact that there is no central character to easily cast as the villain. It’s not like “when you have Ken Lay and Jeff Skilling in the middle,” he says. Backdating is a scandal without plot or personal tragedy—just billions of dollars of company money skimmed by hundreds of executives. At the same time, backdating doesn’t represent some inherent flaw or breakdown in corporate America the way Enron did. “The options backdating has nothing to do with the company’s operations,” says Henning, “It’s about corporate greed, and that is not a new story.”

If the scandal has escaped broad public scrutiny, regulators and many corporate boards are paying closer attention. There are more than 130 investigations under way, and about 50 executives have lost their jobs or resigned over backdated options so far. In an effort to get ahead of the scandal, many companies, like RIM, launched their own internal probes before the SEC came knocking. Had it not been for the new era of accountability stemming from earlier scandals, backdating might have carried on for years before being uncovered, says Leonard Brooks, a business ethics professor at U of T’s Rotman.

And the worst may be yet to come, especially in Canada, where the scandal only now appears to be bubbling to the surface. Last week, researchers at the University of Manitoba found evidence that backdating is happening here. “This is a very common practice in Canada,” says Powers. “RIM is only the tip of the iceberg.” M