Boy, did the Business Press Maven have to up his meds when he read a recent editorial that came out in full support of backdating options. In fact, I don't think a business editorial has been more off-base since our ancestors were sharpening stones. ( Ask me sometime and I'll tell you how I really feel. )For those of you new to the planet, backdating options is the sleazy, shortsighted, demonic practice of giving executives the best cost basis possible on options -- after the fact. In other words, Mr. Money Bags Executive does not budge his stock an inch. But he is granted options, with the issue date established (retroactively) to coincide with a low point in the stock's past. Money for nothing, checks for free. Well, not exactly for free. There are plenty of side costs to this slick arrangement, at least for shareholders. The practice, as it was -- uh, practiced -- was probably legal, but maybe just because no lawmaker ever had an imagination dark enough to think that people would actually do something like this (if that doesn't tell you something, I don't know what will). In any event, the Justice Department and the Securities Exchange Commission have been investigating dozens of companies, and many have acknowledged the possibility of having to restate earnings. Apple ( AAPL), Home Depot ( HD), Microsoft ( MSFT), UnitedHealth Group ( UNH) and plenty of smaller companies such as Monster Worldwide ( MNST) and Marvell Technologies ( MRVL) have been embroiled in options-backdating controversies. In fact, so many companies have been identified by authorities, the media or themselves as offenders (of common decency if not the letter of the law) that there is probably not much danger in any one company seeing its share price hurt for past practices -- unless civil proceedings start hurting EPS. But there may be a world of hurt for any company that attempts anything remotely like this in the future.
Here's why backdating options has high hidden costs. Options are supposed to be given for incentive. That way, the proceeds management gets its grubby hands on theoretically go hand in hand with benefit to the shareholder. If management is allowed to game the system, it does not have to build long-term value. And gaming the system takes focus. You don't want a CEO on the horn with his lawyer and accountant half the day figuring out ways to squeeze the company even more than they have. Late this week, the options gaming got a little wackier. A commissioner of the same SEC that is investigating some of this option-pricing nutiness said that granting stock options ahead of known good news was not insider trading but a benefit to shareholders. Companies could then pay executives that way and give them less salary. This seems fanciful, if not delusional, to me. My test of fairness is always: If it would even look bad at a dog track, don't let it be legal. Into this mountain of common sense flies The Wall Street Journal's Holman W. Jenkins Jr., whose column followed a story line the paper uses consistently (and which consistently harms shareholders): If it is done by corporate executives, it must be OK. Where are my meds? No one can criticize CEOs for negotiating a pay deal that benefits them, Jenkins said. But the board is corrupt for saying yes, and in fact, since the CEO works for the shareholders, any deal that causes so much potential grief is irresponsible. Jenkins also prattles on about how backdating simplifies the entire pay process. But that's like saying to shareholders: Leave your door unlocked, because that will allow you to avoid the complication of thieves breaking a window. Anyhow, let's hope Jenkins was just starved for material and tried to make a contrarian argument of probably the only subject in the business world that lends itself to none. Jenkins, for this board-certified disservice to shareholders on such an important current topic, you get the dreaded Business Press Maven "Back of the Hand" award.
Bad, apologist, bad. From deathly bad editorials, to the subject of death ...
She then summed up with some armchair preaching: "We are human beings, and to each other we are not fully knowable. There's a lot of mystery in life. The life force can leave before we ever know it's withdrawing." Peggy, trust me, as I read this I could feel my life force withdrawing. If death wasn't bringing out the Bible-thumping or crocodile tears, it was doing something worse: softening better judgment. The New York Times got historically inaccurate. They said that Lay went wrong only in putting a happy face on Enron's troubles. They refer to Lay's "wishful thinking," something we are all guilty of. But let's set that straight. After all, while innocently telling others how great things were, the King of Wishful Thinking was also dumping stock like there was no tomorrow. Wrote The Times: "And in the end, it was his desire to see things as he wished them to be, not as they really were, that was his fatal flaw. He never really had the judgment a good chairman or chief executive has to have." Just the judgment of a good stock trader, God bless his heart, who sure knew when to take a profit. Let's compare that touchy-feeliness to what Sue Cameron, that worthy recipient of the "Nod of Approval," said: "Lay told employees to talk up the Enron stock, yet he himself, who had an income of over $200 million since 1999, was busy selling his stock." I guess one man's wishful thinking is another's pump and dump.