Accounting & Tax

Atkins Warns of Overreaction in Options Furor

SEC commissioner Paul Atkins says an overzealous response to option backdating threatens a form of compensation that has benefitted shareholders, a...
Helen ShawJuly 7, 2006

A Securities and Exchange Commission overreaction to the ongoing stock-option backdating scandal could threaten legitimate compensation practices, commissioner Paul Atkins warned in a speech on Thursday.

Atkins’s speech, given at a conference of the International Corporate Governance Network, comes at a time when the SEC and other regulators are investigating more than 50 companies to determine if their granting of stock options was illegal.

Options have a strike price that is supposed to be set on the date they are granted to an employee. A stock option is “backdated” when the company assigns the option a grant date from the past, when the stock price was lower than it was on the actual date the employee received the option. That makes it easier for the option to hit the strike price.

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In his speech, Atkins emphasized the need to distinguish between option fraud and legitimate option-granting practices. For example, purposefully backdated options are legal as long as they are properly accounted for and disclosed.

Atkins also questioned whether there was anything demonstrably wrong with the practice of “springloading,” in which a company schedules an option grant before positive company news is expected. Not only would it be difficult to prove that a board awarded options in anticipation of good news, he said, there may also be good reasons for a board to do so. Shareholders, he argued, benefit from the practice of granting well-timed stock options because they may allow the company to spend less cash on salaries.

Calling options a “cash-preserving approach to compensation,” Atkins said option grants are the result of a board’s business judgment, which courts will not second-guess when corporate decisions are made in good faith.

Nor, he warned, should the SEC second-guess such moves. “We should not through enforcement actions undercut the business judgment rule — we do so to the peril of stockholders,” Atkins said, adding that he opposes any effort to mandate that options be granted according to a preset schedule. “We must take care not to undermine a compensation arrangement that has served shareowners so well for so many years,” he said.

Commissioner Cynthia Glassman also gave a speech Thursday, stating during the question period that followed that some forms of options backdating now under investigation were “clearly illegal,” according to Reuters. Glassman did not identify companies under investigation or say when enforcement would follow.

Although Glassman’s comments did not contradict those of Atkins, the difference in their emphasis was unusual for the two Republican commissioners, whose views — and commission votes — typically coincide.