Corporate governance and backdating of executive stock options tiener dating

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[ILLUSTRATION OMITTED] Prior to the passage of the Sarbanes-Oxley Act (SOX) in July 2002, the regulations surrounding the disclosure of option grants in financial and proxy statements and the requirements for filing notice of option grants to the SEC were fairly loose.

While SOX now requires a company to file a Form 4 with the SEC within two days of an option grant to key employees, before SOX it might have been months before notice of an option grant was filed with the SEC.

Some companies, for example, could jeopardize debt covenants through changes in book value. While an earnings restatement is decidedly a noncash issue, options backdating could result in large cash out-flows.

This is due to the fact that many companies usually took deductions for option exercises on their tax returns.

Along with this more lax disclosure requirement, companies may also have not had robust enough internal controls to catch those backdating without proper authority.

Consider the pressure facing a large number of technology start-up companies that were competing intensely for talent and lacking the ability to compensate employees with cash.

If the date was reported improperly, however, the company must recalculate the intrinsic value of the option as of the "real" grant date and reflect that value over the vesting period of the options, as they were earned.

Regardless of the size of these restatements, most companies will dismiss them in public communications as "noncash." Nevertheless, it is important to understand this within the context of the reported earnings and the balance sheet during the time period in question.

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We conclude that while executive compensation schemes (e.g., stock options) were originally intended to help remedy the agency problem by tying together the interests of the executives and shareholders, these schemes may have actually become “part of the problem,” and that the solution ultimately depends upon whether directors and executives accept that all of their actions must be based on a set of core ethical values.

Under IRC section 162(m), compensation expense is generally not deductible to the extent it exceeds

We conclude that while executive compensation schemes (e.g., stock options) were originally intended to help remedy the agency problem by tying together the interests of the executives and shareholders, these schemes may have actually become “part of the problem,” and that the solution ultimately depends upon whether directors and executives accept that all of their actions must be based on a set of core ethical values.

Under IRC section 162(m), compensation expense is generally not deductible to the extent it exceeds $1 million per year.

An exception is made for incentive stock options that are "performance-based." The rationale is that because incentive options are usually granted "at the money" (i.e., the stock price fixed on the grant date), they have value only if the business improves and the stock price goes up.

The cash cost of this could be exacerbated by the intangible costs, such as management distraction, as well as other unrelated items that could be found by the SEC during its work. Companies that are found to be backdating options will likely have to restate their financial results for prior periods.

This is because such companies probably would not have recorded any compensation costs on the income statement for the options in question, as their policy would most likely be to set the intrinsic value of the option to zero, with the strike price of the option equal to the market value of the stock on the grant date.

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We conclude that while executive compensation schemes (e.g., stock options) were originally intended to help remedy the agency problem by tying together the interests of the executives and shareholders, these schemes may have actually become “part of the problem,” and that the solution ultimately depends upon whether directors and executives accept that all of their actions must be based on a set of core ethical values.Under IRC section 162(m), compensation expense is generally not deductible to the extent it exceeds $1 million per year.An exception is made for incentive stock options that are "performance-based." The rationale is that because incentive options are usually granted "at the money" (i.e., the stock price fixed on the grant date), they have value only if the business improves and the stock price goes up.The cash cost of this could be exacerbated by the intangible costs, such as management distraction, as well as other unrelated items that could be found by the SEC during its work. Companies that are found to be backdating options will likely have to restate their financial results for prior periods.This is because such companies probably would not have recorded any compensation costs on the income statement for the options in question, as their policy would most likely be to set the intrinsic value of the option to zero, with the strike price of the option equal to the market value of the stock on the grant date.

million per year.

An exception is made for incentive stock options that are "performance-based." The rationale is that because incentive options are usually granted "at the money" (i.e., the stock price fixed on the grant date), they have value only if the business improves and the stock price goes up.

The cash cost of this could be exacerbated by the intangible costs, such as management distraction, as well as other unrelated items that could be found by the SEC during its work. Companies that are found to be backdating options will likely have to restate their financial results for prior periods.

This is because such companies probably would not have recorded any compensation costs on the income statement for the options in question, as their policy would most likely be to set the intrinsic value of the option to zero, with the strike price of the option equal to the market value of the stock on the grant date.

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