ZIFFPAGE TITLEFinding Problematic Options

By Doug Bartholomew  |  Posted 2006-06-15 Print this article Print

It's the latest scandal to hit corporate America--companies appear to have backdated stock options to insiders so they're more valuable. Software can help flag even the appearance of wrongdoing.

One way equity administration software can help is by allowing executives and others to see exactly what options have been approved and for what issue dates. "We have strong audit logging technology in our system to check all transactions," Levi says. "The document management function memorializes stock options and related dates, and enables you to see what's approved and by whom."

Thus, an executive or director with access to the system can check the share price on the grant date and see if there is even the suggestion of hanky-panky involved in the timing of the options. Such possible wrongdoing could then be immediately referred to the board's audit committee for further review and action if warranted.

Unfortunately, the actual granting of options remains an activity separate from any automated workflow tracked by package software. Thus, unless a sharp-eyed director spots an option date as being the same date the company's shares tanked, it's unlikely to be noticed as anything unusual. "It's the responsibility of the people who put the options information in front of the board," Levi adds. "Of course, it's possible to create a 'rubber stamp' workflow."

As a result of the current options backdating scandal, Levi, for one, thinks board members may be more likely to check options dates before giving their approval. "The board climate is changing dramatically, and there is much more responsibility and due diligence on the part of boards these days," he says.

At the same time, there is greater emphasis on equity administration systems that can provide sufficient visibility to track the options issuance process. "We are certainly seeing an emphasis on transparency with respect to equity administration," Levi observes.

For instance, Computershare, which manages 90 million shareholder accounts for more than 14,000 corporations, offers a plan administration service that automatically keeps track of blackout periods when executives receiving options are not permitted to exercise them. "We flag insiders and key executives on our system to ensure they receive an appropriate level of service—and so that we can work with your administrative and legal teams to automatically manage blackout periods and facilitate seamless filing of insider SEC documentation," the company's Web site states.

Of course, the real fallout from the options backdating scandal will land squarely on corporate America and its questionable use of options to promote shareholder value by providing greater incentive to executives.

The irony here is that at most corporations, when you talk to the chief compliance officer—a relatively new position at many firms since Sarbanes-Oxley—the first thing he or she will tell you is that their culture of corporate compliance begins at the top.

If that's true, investors had better beware.

Doug Bartholomew is a career journalist who has covered information technology for more than 15 years. A former senior editor at IndustryWeek and InformationWeek, his freelance features have appeared in New York magazine and the Los Angeles Times Magazine. He has a B.S. in Journalism from Northwestern University.

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