Option backdating board interlocks
We find that the selection of peers depends to a large degree on firms of similar size in the same industry but that there is substantial variation in the chosen peers across firms.We also find that when firms deviate in their selection of peers from firms of similar size and industry that the peers selected tend to be larger with higher pay.We use this large sample to explore: the frequency and contractual nature of such awards; whether performance-vesting (p-v) provisions specify meaningful performance hurdles for executives; the magnitude of the incentives to increase value or risk conferred on executives by p-v provisions; the influence the provisions have on accounting and stock-price performance, financial policy, investment policy, and earnings management; and the relation of the propensity to use p-v provisions and the height and form of the vesting hurdle to firm, governance and CEO characteristics.Following the study by Bizjak, Lemmon, and Naveen (2008) we collect the compensation peer groups reported in corporate proxy statements for the S&P 1500 firms.The alternative is to gamble that the company is in the fifty percent of companies that did not backdate any option grants.
It also significantly changes the stakes for corporate boards and officers.
This conclusion would clearly make the practice much more wide-spread than anyone had initially thought.
The study also suggests that the practice may have proliferated as a result of directors who held positions on more than one board.
Overlapping board memberships may have facilitated the transmission of the practice from one company to another through the small and exclusive club of corporate directors.
This suggestion is also contrary to the current wisdom that the practice was management driven – at least that is the inference from the two cases the SEC and DOJ have filed.
Because of the features of these instruments legislators, regulators and shareholders have raised concerns about them.