Six degrees of options backdating?

John Dimsdale Oct 19, 2006

KAI RYSSDAL: Seems like every time you turn around there’s another company caught up in the stock option scandal. A study out today has an interesting new theory as to why. Not to cast aspersions, but a rough comparison might be everyone in an office catching the same cold. Marketplace’s John Dimsdale explains.

JOHN DIMSDALE: The reform organization called the Corporate Library looked at 120 companies under investigation for backdating stock-option grants. The Securities and Exchange Commission is looking into whether option grant-dates were manipulated to give executives a bigger profit when they exercised their option to buy shares in the company.

The Corporate Library’s Paul Hodgson found 40 percent of the companies with backdating problems currently have one or more overlapping directors. Hodgson says that’s more than twice what you’d expect.

PAUL HODGSON: The very fact that there are shared directors at these companies doesn’t definitely prove they were the way that the options backdating practices spread among these companies. But it would certainly indicate that this is a possibility.

Hodgson says before government reforms forbid the practice, directors thought stock-option backdating was acceptable.

Thomas Lys, who teaches corporate governance at Northwestern University, says governors serving on more than one board are likely to spread the management practices they learn from company to company.

THOMAS LYS: Board members, when they serve on multiple boards, there are some relationships among those companies. In other words, they tend to operate in similar businesses, have similar issues. You may also expect that they use the same consultants, that whatever works at A will also work at B. Etcetera.

An SEC official tells Bloomberg News government investigators are looking into the link between stock-option backdating and board-level interrelationships.

In Washington, I’m John Dimsdale for Marketplace.

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