Even more on stock options backdating

Ryan argues that the problem isn't stock option backdating, but that the board is controlled by the managers running the company.

Well, of course it is a problem is that the board is controlled by the CEO. Still, the particular problem here isn't that the board is handing the CEO a lot of money, but that they are telling the shareholders that they aren't doing this--and that what they are really doing is offering the CEO an incentive to improve the company's performance.

Interestingly, the backdating problem is claimed to have diminished with passage of the Sarbanes-Oxley Act. (Despite this, the charges the Justice Department and the Securities and Exchange Commission brought against Brocade Communications today involved activity that stretched up until 2004, two years after passage of Sarbanes-Oxley.) SOX requires that stock option issuances be reported within 2 days, rather than the month that was required before. It's much easier to fudge the date of an options issuance when you've got a month to report it, than when you've got 2 days. It's also much easier to notice that options always get issued right before good news is reported if the window is only 2 days wide. (There is also a tax treatment issue involved here that also kinda put the kibosh on backdating, but when a certain economist friend of mine explained it to me, what I heard was "blah blah blah backdating blah blah blah treatment blah blah.")

Also, post-SOX listing standards for the New York Stock Exchange, NASDAQ and other U.S. exchanges now require board compensation committees (the committees on the board of directors charged with setting managerial compensation) to be made up entirely of independent directors. It's probably a little too early to tell if this will have any effect on executive compensation. One argument is that this is all driven by a Lake Woebegon Effect, where every CEO is above average (and demands to be compensated accordingly), and every compensation committee believes it must pay above-average compensation to attract above-average leadership. On the other hand, it's not just a bunch of socialist hippies who are complaining about executive compensation these days. It's also pesky "activist shareholders"--you know, those annoying people ("locusts", as the Germans call them) who actually own the company and show an interest in how their money is being used. They seem to think they would be happier if executive compensation were somehow linked to executive performance.