More Hide-and-Seek With CEO Pay
It won't bring down entire companies, like the malfeasance at Enron and WorldCom did. But the creeping scandal over backdated stock options is claiming an increasing number of CEOs, including some of Silicon Valley's brighter lights. The latest to fall are Shelby Bonnie, CEO and cofounder of CNET Networks, and George Samenuk, CEO of McAfee, who both resigned on Wednesday. In each case, the company appointed internal investigative committees that documented the improper backdating of options issued to executives, which effectively allowed them to pocket thousands of dollars or more in risk-free profits. Among other things, backdating may bring penalties from the Securities and Exchange Commission and the IRS, if the deals were not properly disclosed.
Expect more ugly news on backdating. So far, about 125 companies have been linked to problems with the practice, which is not technically illegal but is strongly discouraged by investor advocates. And that list is likely to mushroom. "I expect many more revelations," says Howard Schilit, a forensic accountant and author of Financial Shenanigans. "The backdating scandal is probably the most serious accounting scandal that I have ever witnessed." He predicts that hundreds of companies could be affected before the practice is scrubbed from the corporate playbook.
For all the attention it's starting to get, backdating involves relatively small amounts of money, at least compared with the huge scandals from a few years ago, when multimillions in earnings were often misstated. McAfee, for instance, disclosed this week that backdating may require it to restate financial charges of up to $150 million, over 10 years.
But since the options are often granted to top executives—who also approve them, in many cases—the scandal is likely to remain yet another high-visibility blight on CEOs and corporate directors. The practice got a prominent poster child last week when Apple CEO Steve Jobs apologized to shareholders for options granted to certain Apple executives (though apparently not to him) that were backdated to inflate their value. The probe at Apple continues, though Schilit predicts that Jobs will emerge unscathed.
With audit and governance committees hard at work to root out backdating, there could be a flurry of awkward admissions by companies through the last quarter of 2006 and into 2007, predicts Frank Glassner, CEO of Compensation Design Group, an executive pay consulting firm. In some measure, he says, that's allowing corporate governance committees, empowered by the Sarbanes-Oxley reforms of 2002, to flex their muscles for the first time. But it won't necessarily last. Once backdating is cleaned up, he predicts, "then we'll move on to the next adventure in executive pay."
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