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Afterward, the number of suspicious grants dropped in half. (BRCM), a communications chip company, stands out as one of the best examples of how an excessive option plan can dilute shareholder interests.The tech bubble of the late 1990s was a time when top-notch engineers and programmers routinely demanded generous stock option packages as inducement to sign on with public companies.I recall reading somewhere that the board is supposed to represent shareholders’ interests, not the CEO’s!I’ll have more to say about this practice using one of the “poster boy” option abuse companies.Instead of using excess cash to buy back stock at a short-term discount, a long list of blue chip companies used the post-Sept. A recent Wall Street Journal article entitled “Executive Pay: The 9/11 Factor,” describes the sequence of events (my emphases):“A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock market decline, to give executives especially valuable options.A review of Standard & Poor’s Execu Comp data for 1,800 leading companies indicates that from Sept.Simply put, backdating a stock option grant amounts to ripping off shareholders by shortchanging the company treasury.
The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999-2003.“Ninety-one companies that didn’t regularly grant stock options in September did so in the first two weeks of trading after the terror attack. ‘If you believe the company is going to do well, and here is an external event that is affecting the market, and you’ve made a decision to reward executives, you go ahead with it,’ Mr. ‘Life goes on.’ …“At Stryker…post-9/11 stock option grants to several executives appear to have been initiated by the chairman and CEO at the time, John W. Brown would ‘periodically tell us if he thought the stock was attractive,’ and then the board would decide whether to award options, said Mr. Besides, he added, no one could have known whether the stock would rebound immediately or continue to slide.“Mr.
This practice requires at least a nominal investment on the part of the option holder if he or she wishes to exercise.
The CEO’s conflict of interest between short-term personal wealth maximization and long-term shareholder interests tends to tilt in the shareholders’ favor.
But first, on the same page of the July 15 Wall Street Journal is another article quoting an early whistle-blower in the backdating scandal.
He suspects that it will turn out much worse than what has been exposed in the media thus far (emphasis added): “Erik Lie, a University of Iowa business professor whose work helped fuel regulatory inquiries into backdating, is expected to release fresh research this weekend showing anomalies that suggest a huge cohort of companies may have played games with their options grants.