As UnitedHealth CEO Steps Down, Options Scandal Will Go On
UnitedHealth's announcement that CEO William McGuire will step down December 1 is the biggest, but nowhere near the last, boardroom repercussion of the stock option backdating scandal, predicts one of the economists who uncovered the questionable practice.
Randall Heron, an associate professor of finance at the Kelley School of Business at Indiana University, coauthored a study showing that even after the 2002 Sarbanes-Oxley law, as many as 5 percent of all executive stock option grants may have been manipulated to guarantee executives a profit.
"A lot more heads are going to roll," Heron said this morning.
And in fact, this morning, Altera announced that it would take a $35 million charge because of option irregularities and that its chief financial officer, Nathan Sarkisian, would be retiring from the chip company.
Heron says that recent prosecutorial scrutiny of option manipulations has probably reduced the practice dramatically. More than 100 companies have reported that they face regulatory or prosecutorial investigations of options manipulations. But Heron says the fallout from the long-standing practice has barely begun, as the investigations launched when the practice came to light last year are only now coming to conclusion.
"What we are seeing now is just the early wave" of what Heron believes will be a widespread sweep of executive and boardroom changes.
And while regulators and lawmakers are only beginning to consider how to prevent backdating in the future, Heron says they will next need to consider what he considers to be an equally pernicious practice: "spring loading." Other researchers have found evidence that companies sometimes issue employees and executives stock options just before the company announces good news such as high profits or the launching of a new product. That way, the stock price jumps right after the employees' options were issued, making them immediately valuable.
"Spring loading is a form of insider trading. And the shareholders are harmed" when insiders issue themselves options at prices they know will soon rise, he says. The best way to prevent such manipulations, he says, is for companies to simply issue options on, say, the same day every year. Of course, employees could still hold back good news until after their options are issued, but Heron says that with today's heightened scrutiny of options, he thinks companies are increasingly unlikely to engage in such suspicious behavior.