Double Dipping, Corporate Governance and Executive Compensation: Whose Duty is it Anyway?

The Securities and Exchange Commission filed civil injunctive actions against the former chief financial officer and former controller of Engineered Support Systems, Inc., respectively, alleging that they perpetrated a six-year fraudulent options backdating scheme. The action alleges they granted in-the-money stock options to themselves and to other officers, employees, and directors, without proper disclosure. The allegedly unlawful comp is approximately $20 million, $15 million of which was realized by top executives and directors. The complaint alleges certain instances where the company changed dates on the option issuance twice with intent to pick the lowest value of the stock for the year and maximize profits. The value of options are the difference between the set price (date of issuance) and the strike price of the stock (date of exercise).

Last year, ESS, a St. Louis concern, was acquired by DRS Technologies of Parsippany, New Jersey. DRS said it is neither a target or subject of the government investigation, inasmuch as the conduct in question occurred before the acquisition.

If these allegations are proved true, ESS is an example of an organization that did not encourage ethical conduct and compliance with the law (see Federal Sentencing Guidelines and the SEC’s Seaboard Report for more on that subject). But if the organization was corrupt, why are the chief financial officer and controller being singled out by the SEC? Sources reported to the WSJ that the former CEO and his son, who was a director (no nepotism policy apparently) are subject to inquiries by the DOJ.

Perhaps every organization is governed somewhat differently, but certain basic elements of corporate governance should be in place for approval of executive compensation in any organization. There should be (1) oversight and approval by an independent committee of directors, (2) upon recommendation of the chief executive, chief financial officer and general counsel, respectively, and, (3) someone in the human resources chief, or his or her executive compensation and benefits specialist, should approve and recommend any executive compensation plan to the CEO, CFO and GC.

Here is a copy of the SEC Press Release.



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