Begging the Question: Backdating Scandals Suggest Need for Corporate Governance Reform

With the recent spike in options backdating scandals, the time has come to shift attention to advocating for bona fide improvements in the governance and oversight of executive compensation programs. Reforms are needed to protect against self-dealing by unscrupulous human resources, finance, legal and other executives involved in long-term incentive programs.

Chief executive officers and chief finance officers, and in-house corporate lawyers are regulated by the Securities and Exchange Commission through the certification process of SOX 302 and the reporting-out duties in SOX 307, respectively. Outside directors have federal statutory and state common law oversight duties. In contrast, human resources executives, key decisionmakers and gatekeepers in the executive compensation process, are not regulated directly under the securities laws.

Considering the breadth and seriousness of the backdating scandals, the time may have come for Congress to consider enabling legislation to authorize the SEC through rulemaking to prescribe standards of conduct applicable to all executives in public companies, or at least those involved in executive compensation. The SEC uses disgorgement and injunctions from serving in public companies, but the wave of stock options abuses suggests a need for more prescriptive measures to help avoid governance breakdowns and instill top-down accountabilities. These measures could be achieved through the use of annual certifications from executives overseeing compensation to auditors, attesting that during the year there was no self-dealing, use of position of authority for personal gain, and that the documentation presented to the compensation committee of the board of directors represented a true and accurate account of the company’s program.

Though the SEC rules require accelerated disclosure of options grants and there is appreciation for the problem, more changes might be needed to curb abuses. In testimony last fall, SEC Chairman Cox blamed the options backdating on a tax law from 1993. See SEC Chairman Christopher Cox’s testimony before the Senate Committee on Banking, Housing and Urban Affairs dated September 6, 2006.

The SEC says the crackdown is producing results, but are we kidding ourselves? The investigations have resulted in fines and penalties, but have we dealt with the fundamental questions of governance and accountability?

One Response

  1. Agreed! Your last paragraph addresses the heart of the matter

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