Two counterweights to the prevailing hysteria over "backdating" of stock options are offered in the opinion pages of today's Wall Street Journal. The first, by Richard Mamaro and Ryan Weinstein, asks Should Steve Jobs Go To Jail? (sub req) and cautions about the need to separate accounting violations from criminal fraud:
The most basic element of fraud is deception or deceit, and a typical example is when a company misstates revenues or cash expenses. Yet there is no proof of deceit or concealment in alleged backdating cases. In fact, it is remarkable how much companies have disclosed about their option grants. Company 10-Ks, Form 4s, proxy statement and other filings were replete with information about options. Indeed, despite media accounts that suggest that executives were secretly lining their pockets, the economic value of options granted, whether to executives or to the rank-and-file, was no secret at all.
If the alleged backdating did not involve self-dealing or kickbacks, and options expenses were immaterial to investors, how were investors harmed? If the harm was only "mak[ing] a hash of the financial statements," as SEC Chairman Christopher Cox has suggested, shouldn't backdating cases be charged as books-and-records violations rather than securities fraud? Despite the media clamor and various colorful analogies to lightning, lotteries and pick-pocketing, most options backdating cases are not fraud, but books-and-records errors.
It is understandable, in an era when public concern is growing over rising executive compensation, that attention should be turned to stock options. Individual companies may want to reconsider how and at what volume they grant options. Yet a thoughtful look at the elements of securities fraud may help observers distinguish between accounting issues and criminal acts.
The second is by Holman W. Jenkins, who has been fighting the rush to judgment over backdating ever since the issue first surfaced. In today's Business World column (sub req) he continues his effort to stem the tide:
Much reporting has made it sound like backdating was the equivalent of executives taking erasers and white-out to their paychecks to add a couple of zeroes -- and public understanding still suffers from this bum steer. But all that backdating comes down to is a nonmaterial accounting irregularity (yes, readers, accounting rules should be obeyed!) involving a defective judgment about whether "in the money" options needed to undergo expensing.
We're still at the beginning of the so-called scandal, and many executives will likely end up paying a price for this poor decision. But in no way does it implicate theft of shareholder money or even substantive accounting fraud. Here, we propose to violate a cardinal newspaper ordinance that logic should never be discussed in a newspaper. The beginning of all error was the media's unwarranted assumption, to put a fine point on it, that backdating was somebody's way of paying an employee more than, um, er, that same somebody intended (er, sputter, gurgle).
You see the problem: Whether options are backdated or not, they must reflect the intentions of whoever designed them. If I'm designing the package, how can I intentionally design it to pay more than I intend?
He also addresses the Apple case and finds an unexpected ally in (gulp) Al Gore:
Against this (who would have thunk it) stands Mr. Gore, yelling stop to the lynch mob. In Apple's own backyard, the San Jose Mercury News delivered a critic's delectable complaint that the Gore investigation had "tried to preserve the company's No. 1 asset" in Mr. Jobs. Isn't that exactly what a shareholder wants from the Apple board right now? The Apple case is a marvelous example of why corporate governance reformers do shareholders no favor even as they expand their own bailiwicks by making governance reform a never-ending end in itself. Indeed, Mr. Gore deserves credit for putting himself in the line of fire at all. And worse is surely coming: Mr. Jobs is starting to face insinuations of insider trading for stock sales after the first backdating cases broke but before Apple was implicated.
Mr. Gore might have waved off the special committee assignment and sought to cover his own hindquarters from the lawsuits and criticism aimed at Apple. That's been the tendency of directors since Sarbanes-Oxley enacted greater individual liability for accounting scandals: head for the high grass and hire a lawyer to point fingers at somebody else.
It's no accident that in the last 25 years, the value of America's corporations rose 12-fold, and the corporate reform industry grew right in step to tell us how badly and corruptly our companies are governed. The more successful the stock market is at cultivating strong businesses, the more we're told the whole system is rotten, in need of reform.
We just wonder what Mr. Gore thinks about all this now.
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