Home Depot said it had an unrecorded expense of $200 million as a result of errors in its stock options practices going back 26 years. The embattled home improvement retailer asserted that it does not expect the errors to have a material impact on its financial statements, said a report from a board subcommittee investigating the options granting practices.
The subcommittee also stressed that there was no intentional wrongdoing by any current member of the management team or the board. The report, however, also concluded that the company’s stock administration department retroactively added employees to lists of approved grantees, or changed the number of options granted to specific employees, without authorization of the full board or a board committee to correct administrative errors.
It added that several option grants awarded to rank-and-file employees were made pursuant to delegations of authority “may not have been effective under Delaware law.” In addition, the report found “numerous instances” where beneficiaries of grants who were required to report them to the Securities and Exchange Commission failed to do so in a timely manner or at all.
In August 2006, a subcommittee of the audit committee began the review with the assistance of independent outside counsel Hogan & Hartson, the company stated. According to the report, for annual option grants and certain quarterly grants from 1981 through November 2000, the stated grant date was routinely earlier than the actual date on which the grants were approved by the board. In almost every instance, the stock price on the apparent approval date was higher than the price on the stated grant date.
“The backdating occurred for grants at all levels of the company,” it added. “Management personnel, who have since left the [c]ompany, generally followed a practice of reviewing closing prices for a prior period and selecting a date with a low stock price to increase the value of the options to employees on lists of grantees subsequently approved by a committee of the Board of Directors.”
The report also found that all options granted since 2002 had an exercise price based on the market price of the company’s stock on the date the grant was approved by the board. During this period, the stock administration department corrected administrative errors retroactively and without separate approvals. These administrative errors included “inadvertent omissions” of grantees from lists that were previously approved and miscalculations of the number of options granted to particular employees on approved lists.
The report also discovered that all options granted from December 1, 2000 through the end of 2001 had an exercise price based on the market price of the company’s stock on the date of a meeting of the Board of Directors or some other date selected “without the benefit of hindsight.” It added that the February 2001 annual grant was not finally allocated to recipients until several weeks after the grant was approved. During this period, the stock administration department also corrected administrative errors retroactively and without separate approvals as in the period from 2002 to the present.
The study also said the annual option grants in 1994 through 2000, as well as many quarterly grants during this period, were not finally allocated among the recipients until several weeks after the stated grant date. “Because of the absence of records prior to 1994, it is unclear whether allocations also postdated the selected grant dates from 1981 through 1993,” it added. What’s more, for many of these annual and quarterly grants from 1981 through December 2000, “there is insufficient documentation to determine with certainty when the grants were actually authorized by a committee of the Board of Directors,” it added.