What to do when you’re found rewarding executives with unusually positive returns.
Know that you’re not alone. More than 250 companies have announced internal reviews, S.E.C. inquiries, or Department of Justice subpoenas in the two years since a professor at the University of Iowa published a report in 2005 noting that backdating options might be, well, illicit or illegal. Among those with some explaining to do: Apple, Barnes & Noble, McAfee, Novell, and Forrester Research.
Most controversial was the assertion by the professor, Erik Lie, in that 2005 report that “unless executives possess an extraordinary ability to forecast the future marketwide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.” Oops.
The situation becomes dicey—read: illegal—if the backdating hasn’t been revealed to investors and okayed by them or the board. Backdating can lead to overblown profits, significant unpaid taxes, and courtroom-bound executives.
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