Options scandal averted

05Sep06

Although our coverage of the options backdating scandal has waned as the story transitions from the discovery phase to the investigation and prosecution stages we are still keeping an eye out for new angles on the story. We are usually less interested in the the specifics on a specific company than in the larger story of privilege and executive (over)compensation.

In a prior post we discussed our hunch that given the seemingly widespread nature of options backdating that there had to be a source to all these option plans. We suspected that so-called executive compensation consultants were likely suspects. In at least one instance we were wrong.

In the Wall Street Journal, Mark Maremont reports on options backdating at Tyco International (TYC). Given the significant number of court filings there is some additional insight into this company’s attempt to compensate management via backdated options.  In this case, the compensation consultants called management to to task.  From the article:

Tyco International Ltd. backed off a 1999 plan to grant a type of backdated stock-option award after being warned against the practice by an outside compensation consultant, according to court records.

The admonition by the consultant, Towers Perrin, was included in hundreds of documents entered into evidence in last year’s criminal trial of two former Tyco executives, but hasn’t previously been connected to the current options-manipulation scandal.

With scores of companies under federal investigation for backdating, some executives and defense lawyers have tried to defuse the situation by asserting that the practice was so common that many people must have believed backdating was proper. But the clear warning in the Tyco case shows that at least some outside advisers were aware that backdated stock options were problematic.

This is of course only one case. But it is heartening to read that at least one player in this saga was aware at the time that management’s goal in options backdating was wrong, if not illegal. Unfortunately this is not going to be the last case in this ongoing options backdating scandal.

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