Backdating scandal illustrates larger ethical deficit
With more than 100 companies under investigation and 30 officers and directors out of their jobs because of it, the scam involving backdating of stock options to further enrich CEOs has taken on the proportions of a major scandal in corporate America.
Did you really think they ended with Enron, WorldCom and the like?
This latest wave of ethical wrongdoing and illegality in the executive suite is part of a wider problem among America’s business leaders and their unhealthy obsession with excessive compensation. It is further evidence of both a class of misguided and ethically challenged CEOs who have a misplaced sense of entitlement in compensation matters and the continuing failure of directors to demand and enforce a culture of integrity among those they hire on behalf of shareholders to run the corporation.
Several years ago, I dubbed the trend in excessive CEO pay the mad cow disease of the North American boardroom. It was a view that captured considerable reaction even in the early days of the Internet. Later, re-pricing stock options became all the rage, reflecting the “do-over” mentality of CEOs and management who didn’t want to be held to a deal when their game plan didn’t pan out. Writing in The Globe and Mail, and later in an interview with Report on Business Television, I called the fad in re-pricing options the most subversive device ever conceived in modern business.
Now we have an even more reprehensible craze: fudging the books so that it looks like the options were struck when the stock price was lower than it really was, thus giving the recipient a false gain over what otherwise would have been the case. Big names have been mentioned in connection with the current investigations, including: Apple Computer, Barnes & Noble, CA, CNET Networks, Comverse Technology, Home Depot, McAfee Inc., Restoration Hardware, Research In Motion and UnitedHealth.
The scandals have already claimed CEOs in several of the companies cited. The former CEO of Comverse remains a fugitive from U.S. justice. The head of McAfee is gone. Yesterday, the top man at UnitedHealth resigned. Today, it was the CEO’s turn at KLA-Tencor. There will be more bad news to come, and many more in the corner office and boardroom to go.
Interesting, too, is the fact that many of the same firms under investigation have a reputation for being overly generous toward their CEOs. CA became infamous and created something of a shareholder revolt when then CEO Charles Wang and a small group of his lieutenants paid themselves more than a billion dollars in one year. Mr. Wang’s successor, Sanjay Kumar, is currently serving time in a federal detention facility for obstruction of justice and securities fraud. This was a man who told BusinessWeek in 2002, “In the post-Enron days, governance has become critical” (and for that less than brilliant observation, among other things, and much to my disgust, BusinessWeek voted CA one of the most improved companies in corporate governance that year). Recently ousted UnitedHealth CEO William McGuire could leave with nearly a billion dollars in options and benefits. He’s already made more than half that since 1991. And Home Depot has become something of a poster child for runaway pay to CEO Bob Nardelli, on the one hand, and anemic stock performance for investors on the other.
The focus right now is on companies and CEOs who bent the rules to enrich those at the top. The larger question, and one not covered in the current investigations by boards or by regulators, is: What other kinds of decisions have these people made where the rules have been ignored or where there has been a failure to do what is in the best interests of the company and all its stakeholders?
I confess that while I was terribly disappointed in these revelations, they did not come as a surprise. What did surprise me was how long they took to unfold. It would have been exceedingly naive to believe that the Enron era scandals were limited to the few that grabbed the headlines when excessive CEO pay remains such a corrosive factor. It was a view I shared with the U.S. Senate Banking Committee in 2002 during hearings which lead to the passage of the Sarbanes Oxley Act:
The commanding heights of stock option packages today reflect this boardroom obsession with compensation. Such lofty sums tempt CEOs to artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.… As the tragedy of Enron’s employees and retirees illustrates, it is the corrosive and blinding effect upon a larger sense of corporate purpose and responsibility that is the greatest danger posed by excessive compensation and by boards who act more as chief tellers to management than vigilant guardians of the shareholders’ assets.
What this scandal reveals is that there are still too many CEOs who will always go for the option of enriching themselves instead of the option of doing the right thing. And there are too many boards that have failed to instill a culture of integrity where doing the wrong thing is simply not an option.