Options Backdating: Red Hat CEO on Avoiding Problems
Matthew Szulik, chief executive officer of Linux operating systems vendor Red Hat, says there's one good solution to avoiding the stock option scandal now being encountered by other companies: Make sure there's transparency involving corporate board decisions.
Baseline executive editor Anna Maria Virzi posed the question to Szulik of what companies should do to avoid problems with backdating options. Here is Szulik's advice for other CEOs.
Q: What can a company do to make sure it does not backdate stock options?
A: The board of directors and executive management team have to be committed to a set of core values. And those [values] have to be reinforced by the hour. There are very few mechanical things, from an inspection standpoint. It's persistent vigilance. It's transparency [into company operations].
Q: How many people at Red Hat have stock options?
Q: What can you as CEO do to prevent backdating?
A: We have a fantastic board of directors. Steve Albrecht, dean of accounting at Brigham Young [University]. Gen. Hugh Shelton, retired chairman of the Joint Chiefs of Staff. We have been able to recruit board members who are committed to creating a great sustainable company. As a part of that, having a set of shared values. The commitment to very strong governance and compliance—it's just not negotiable.
Q: Are options reviewed by the board?
A: Absolutely. There's no options distributed without board approval.
Q: Are they distributed at regular intervals?
A: At Red Hat, we typically give option grants at a specific period of time. So, there are no floating schedules. It's done at a set date and time.
Q: The number of options you hold?
A: I have a lot. But I have been [at Red Hat] forever. I would say relative to my peers across the industry, I am not in their league. I have chosen to make sure the company grows, and not purely exclusively to the benefit of myself.
EDITOR'S NOTE: As of February 2005, Szulik held 5.86 million shares of exercisable options of Red Hat stock valued at that time at $46.3 million, and 1.58 million unexercisable options, according to a June 28, 2005, document filed with the Securities and Exchange Commission.