You have been warned. I am at my most cantankerous. My back, which has a tendency to be delicate, is threatening to go into spasm. This is a result of several years of over-enthusiastic dancing: a passion I share with HSBC’s Asian head of private banking, Monica Wong. My ill-humour has been exacerbated by researching the stock option backdating scandal in the US. As I hobble around my flat, I mutter to myself: “I don’t believe it. I simply don’t believe it.” Think: youthful, female impersonation of the curmudgeon Victor Meldrew featured in the television series One foot in the grave.
Why are most human beings so greedy? Is this nature or nurture? Adam was tempted by an apple (more of apples later). A baby wails and waves his legs in fury if he is not fed and some married men indulge in extra-curricular activities on the basis that one woman is not enough. And why can’t senior executives be satisfied with plump pay cheques? According to the Economist, the typical American chief executive now earns 300 times the average wage, up tenfold from the 1970s.
For the past six months there has been a steady drip-feed about backdating stock options. Somehow, there was never a big story to sink my fangs into, just a lot of murky details. But following a conversation with Stan O’Neal, chairman and chief executive of Merrill Lynch, I decided to delve deeper. I asked Stan why some capitalists (such as Jeff Skilling, the former chief executive of Enron) find it hard to behave with integrity. Stan replied that he was extremely embarrassed by such behaviour. “How can you give options to a dead man?” he grumbled.
Ah yes, the Cablevison case. Cablevision, an entertainment company that owns the New York Knicks basketball team and Madison Square Garden, awarded stock options to an executive posthumously but backdated them to create the illusion that they had been granted when he was still alive. Speechless? Stunned? I am. Stock options are meant to encourage employees and align their interests with those of shareholders. Trying to incentivize a corpse is an interesting example of out-of-the-box thinking. Cablevision has given the term necrophilia – as in an attraction towards corpses – a whole new meaning.
More than 100 American companies are under investigation by the SEC, the US Department of Justice and the Federal Bureau of Investigation for supposedly backdating the grant of share options to dates when the company’s share price was particularly low. Although backdating is not illegal, falsification of company documents to make option award dates appear earlier than originally decided is a breach of securities laws. And a large cast of characters must have been involved – actively or passively – by not asking the difficult questions. The cast could include human resources professionals, internal and external lawyers, the CFO, auditors and the chief executive himself. I have three words for you: Craven corporate conformity.
Imagine the following role-play. A chief executive (Big Daddy) summons the head of human resources (Horatio) to his office.
Big Daddy: ”Ho, I think we should give Chuck some more share options. He’s always been a loyal and hard-working employee.”
Horatio: “Er sorry Sir, do you mean Chuck Silverstein?”
Big Daddy: “Of course, I do Ho. Stop being so thick. There’s only ever been one Chuck around here.”
Horatio (hesitantly): ”But sir, Chuck died last month. Dropped dead of a heart attack at his desk.”
Big Daddy (impatient, with a hint of rage in his voice): “I know that, you idiot. So what? Backdating share options isn’t illegal. Everyone’s doing it. Chuck’s widow’s a nice little lady. She could do with some extra dough right now. I’m simply being a generous and compassionate employer.”
Horatio (thinking of his enormous mortgage, alimony payments and four children who need to be educated at private school): “Er, yes, Sir. I see what you mean Sir. Very generous indeed.”
Big Daddy: “Sort it out, Ho, with all the normal dweebs, lawyers, accountants, blah, blah.”
Big Daddy buzzes his pert secretary: “Sweetie, you can put calls through now. Who am I lunching with?” Horatio scurries off to do his master’s bidding.
You have to have a moral compass. In October, when discussing the boardroom shenanigans at Hewlett-Packard, I admonished: “Always remember how your actions might be interpreted if they were splashed across the headline of a tabloid paper.” And Warren Buffett takes a similar view. He urged Berkshire Hathaway managers: “Let’s start with what is legal but always go on to what we would feel comfortable about being printed on the front page of our local paper.”
I am perplexed. Why do men who have so much – in terms of wealth and reputation – cross the line? Is it stupidity, grandiosity or that old excuse: “I was too busy to think it through properly”? Even an icon of our times, Steve Jobs, co-founder and chief executive of Apple, has been touched by the stock options scandal. An Apple special committee reported in early October that Jobs knew “in a few instances” that stock options were backdated although he did not receive or otherwise benefit from these grants. The report announced that Fred Anderson, who served as Apple’s chief financial officer from 1996 to 2004, would resign from the board.
William McGuire, chairman and chief executive of UnitedHealth Group, one of America’s largest health insurers, also resigned last month. McGuire is a very wealthy man. According to the Wall Street Journal, at the end of 2005 he held UnitedHealth options valued at $1.78 billion. An internal investigation concluded that options granted to McGuire were “likely back-dated”. The chairman of the compensation committee, William Spears, acted as an investment manager for McGuire, and McGuire invested in Spears’s money management firm. These potential conflicts of interest were not properly disclosed to the board. The company has now created a senior executive position of “chief ethics officer”. Do the words: horse, bolted, stable-door, spring to mind? McGuire will be succeeded as chief executive by Stephen Hemsley. Before joining the medical insurer in 1997, Hemsley worked at the defunct accountancy firm Arthur Andersen, where one of his roles was chief financial officer.
