When we mentioned that backdating was not a way for executives to steal from shareholders, a number of readers reacted with incredulity. It sure looks like it might have been bad for shareholders. If nothing else, the amount of attention paid to the backdating affair by journalists probably has many assuming this was some kind of fraud against investors.
Fortunately, we know this isn’t true. There really isn’t much room for argument on this point. Here are three ways we know backdating wasn’t theft.
Steve Jobs Got Backdated Options. If there’s one executive in America who doesn’t need to steal from shareholders, it’s Steve Jobs. He can basically get paid whatever he wants from any company on whose board he serves or that he decides to lead. If he wants more money, he can simply ask the Apple board to pay him more. He has no need to secretly avoid disclosing how he gets paid.
The terms of the options were accurately reflected in company disclosures. Backdating doesn’t make options appear any cheaper for shareholders. They still learn that their executives got options at a certain price that are currently worth a certain amount. There’s no secret as too how much an executive stands to make from his options. It’s not hidden anywhere.
Hundreds of investigations, almost no prosecutions. The SEC and the Justice Department went on the warpath against backdating a couple of years ago. The investigations spanned hundreds of companies and involved hundreds of executives. Only a tiny handful were ever prosecuted, and most of them decided to settle before going to trial. If widespread fraud were going on in backdating, the SEC and the Justice Department would have been all too eager to prosecute the miscreants. But the evidence just wasn’t there.
So what the heck was going on if it wasn’t fraud on investors?
Backdating was simply an accounting move that allowed companies to issue “in the money” options without taking an accounting expense. If they granted “in the money” options without backdating–something they were entitled to do–they had to take a meaningless accounting expense and possibly trigger additional taxes.
“Does it matter in the teensiest whether options are expensed? No, expensing has no probative value whatsoever for evaluating a company’s shares or its compensation policies. Expensing creates a junk number, of zero analytical value,” Holman Jenkins explained in a column a couple years ago.
Actually, backdating probably saved shareholders money by preserving cash. Companies that are short on cash use option to reward employees because employees irrationally over-value the options.
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