Off With Their Heads!
That is by no means an entirely fanciful scenario; the Waterloo, Ontario-based maker of the popular BlackBerry device has already delayed the filing of its second-quarter results and launched an internal investigation into the backdating of past stock options. The internal review is clearly an attempt to come clean publicly before regulators start scrutinizing the books. But it may not fend off an external probe, or the disastrous outcome outlined above. (See RIM Delays Q2 Filing.)
In case you've been ignoring the business press for the last six months, "backdating" is a way of artificially timing the day on which stock options are granted to correspond to a low point in the share price, thereby increasing the payoff when the options are exercised. It's not illegal, and many companies – particularly high-tech ones – have engaged in the practice for years. It is, however, against securities regulations to keep the backdating secret, which many of the companies have also done.
Four CEOs have been forced out in the last week because of backdating revelations, and dozens of companies are either under investigation by the SEC or the Department of Justice, or have announced internal reviews, for stock option irregularities.
Even Steve Jobs, the CEO of Apple Inc. (Nasdaq: AAPL), may not be immune. While an internal investigation concluded that top management is not culpable for Apple's backdating practices, an Apple director and the company's general counsel have both stepped down, and the San Jose Mercury News ran a story this morning speculating that Jobs could still be caught up in the widening scandal.
So, is this dragnet good for shareholders?
Don't get me wrong: I'm not defending the practice of rigging options grants to deliver inflated paydays to privileged executives. Stock options are designed to tie performance to the interests of shareholders, and anything that favors insiders over the average shareholders should be brought to light and eliminated.
I am questioning, however, the knee-jerk ousting of upper management. Take the case of William McGuire, forced out of Minnesota insurer UnitedHealth. McGuire's compensation is outlandish by any measure, but under his leadership the company's share price rose by more than 50 times its value when he arrived. He will walk away with a severance package that could be worth as much as $1 billion, according to The Wall Street Journal. The backdating of his options inflated his earnings from the grants by something like $100 million. Is his departure a good deal for shareholders?
The same question applies to Jobs and to Balsillie, who have masterminded steep rises in their companies' market values while bringing innovative, iconic products like the iPod and the BlackBerry to the market. If they've been found to have approved or ignored backdating practices, the companies' earnings should be restated and their own compensation adjusted downward. But do we really want to get rid of them?
— Richard Martin, Senior Editor, Unstrung