Covering local business scandals and all, there has not been much time to address certain regulators and media members’ attempts to make the apparent widespread practice of backdating stock options (see this WSJ ($) chart of companies that engaged in the practice) as the next reason to bash business interests.
Inasmuch as the practice is really just another method of providing compensation to corporate executives, the issues surrounding the practice appear to be relatively straightforward — whether the options were properly disclosed (if so, then no big deal; if not, then that’s bad) and whether companies properly accounted for them. Clear thinkers favorite Stephen Bainbridge agrees while breaking down the issues pertaining to backdating options in this TCS Daily op-ed (blog post here):

It’s the lack of disclosure that’s the real problem with backdated options. Under tax regulations and stock exchange listing standards, shareholders generally must approve stock option plans. When soliciting shareholder approval of such plans, corporations tell the shareholders that the options issued pursuant to it will be issued with a strike price equal to the market price on the day issued. Backdating options breaks that promise and thus constitutes securities fraud. [. . .]
[But] . . . there’s nothing inherently wrong with paying bonuses by even backdating an option contract, so long as proper corporate procedures were followed and the grant does not amount to a waste of corporate assets, . . .
[Thus,] the answer to backdating options is to be found in Louis Brandeis’ famous aphorism that “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

But even such a lucid analysis cannot stem the mining of claims against companies that attempted to maximize potential compensation through its option grants. As this NY Times article notes, it was standard practice during the 1990’s for many tech companies — including Microsoft — to grant options at the time at which the company’s stock price was the lowest for the year or at the lowest price in the 30 days after a new employee joined the company. In Microsoft’s case, that meant granting options at the stock price’s low price in July, when apparently everyone at the company was on vacation and not tending to the stock price. By the way, Microsoft disclosed and discontinued the practice in 1999 when it took a charge against earnings for the practice.
End of the story? Apparently not. Regulators and plaintiff’s attorneys are already speculating that the practice created a perverse incentive for corporate executives to breach their duties to their company by allowing the company’s stock price to decline during a certain time of the year when the option price was set or in the 30 days following the hire of a particularly important new executive. That dubious notion is already prompting Larry Ribstein to grab for the Advil:

This brought to mind the image of Microsoft executives mismanaging the company every July. “It’s July,” they must have been saying. “Time to write some bad code.” I think I must have gotten some of that July software, sort of like Monday cars.
On the other hand, we’ve also heard a lot about executives driving the stock price up so they could cash in on their options. So maybe every July they just let the stock price do whatever it wanted to do.
On the third hand, remember that the big problem during this period was that everybody thought MS was making too much money, and getting the antitrust folks in on the act. So maybe MS was trying to get its executives to do a little worse so the company wouldnít make so much damn money. At least in July.
On the fourth hand, given MSís stellar stock performance during that period, giving executives the lowest July price would increase the payoffs, and therefore maybe the incentives, for exercises after price was fixed. So maybe some of that November software was enough better than the July software that it all balances out.
By now I’ve got a headache with these incentives.

Recoiling, Professor Ribstein zeroes in on the morality play that is really shaping up here:

But it might not be about incentives after all. It might be that itís just not ìfairî that executives get to, in a way, pick their price when the rest of us are stuck with fate. In fact, it’s not fair that some people got to work for Microsoft in the 90s when the rest of us were teaching, or something.
Whatever the reasoning, I hope that our regulators understand that, although executive compensation is not perfect, regulating in response to every newsworthy imperfection is not going to make it better.

And, as if on cue, this Gretchen Morgenson/NY Times column ($) is the basis for this Professor Ribstein post explaining that, for certain media members and regulators, it’s really not about the practice of backdating options at all — it’s really about the filthy amount of money that some executives make from them.