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Friday, 30 June 2006 |
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Stock option abuse is the latest dirty dealing now exposed in the corporate boardroom, and Daniel Pedrotty from the AFL-CIO Office of Investment explains how CEOs achieve this “perfect payday.”
‘Perfect Payday’: Stock Option Practices Newest in Long Line of CEO Pay Abuses Stock option abuses represent the latest executive pay scandal. Since March, nearly 50 companies have come under scrutiny by the U.S. Securities Exchange Commission (SEC) or federal prosecutors for their option grants. Investigators are uncovering a system rigged to ensure an easy profit for insiders at the expense of ordinary investors.
Home Depot CEO Robert Nardelli is a leading example of outrageous executive pay. In his five years as CEO, Nardelli has collected $245 million, despite the fact that the company’s stock has fallen 12 percent. Home Depot’s chief competitor, Lowe’s, has seen its stock rise 173 percent.
Led by AFSCME, union-sponsored pension funds demanded Home Depot give shareholders a “say on pay” at the annual shareholder meeting in May. Home Depot’s abysmal corporate governance record was on full display at the meeting. The board of directors, the shareholders designated “representative,” failed to show up. CEO Nardelli refused to answer questions and also refused to announce the vote totals concerning shareholder proposals and director elections. Despite this, AFSCME’s “say on pay” proposal received a strong vote, and investors withheld votes from the company’s directors in large numbers.
Among other companies, Home Depot recently disclosed five instances of stock option backdating from May 1999 to August 2000. On all five occasions, directors approved the grant retroactively, in one case more than two months after the stated date of the option. Home Depot also announced that the SEC has begun an informal inquiry into their stock option practices.
In a June 29 letter to Bonnie G. Hill, Chairwoman of the Leadership Development and Compensation Committee Board of Directors, AFL-CIO Secretary-Treasurer Richard Trumka called on on her to “take the necessary steps to recoup any gains from stock options that were improperly granted to Home Depot executives.” Writes Trumka:
On June 16th, 2006, Home Depot disclosed that in five instances stock options were granted on dates later than that used to determine the stock option exercise price. According to a June 17, 2006 article in the Wall Street Journal, all five of these stock option grants were between May 1999 and August 2000.
Stock options give the recipient the right to buy shares at a set price in the future. Recent scrutiny has centered on whether companies backdated grants to periods when the stock price was lower, ensuring a profit. Authorities also are examining companies that scheduled an option grant ahead of good news, or delayed it until after the bad news, which was likely to send shares lower.
Unlike these executives, ordinary shareholders don’t have the benefit of a time machine to go back and purchase stock at historic lows. As the SEC gears up to reform its executive pay rules, the AFL-CIO has called for more transparency around option grants.
When the rules of the game are rigged in favor of corporate insiders, is it any wonder that CEOs now make 431 times the average worker?
In a recent letter to the SEC, AFL-CIO Secretary-Treasurer Richard Trumka urged the commission to:
…diligently pursue its enforcement efforts against individual companies that have been implicated for improperly backdating executive stock options and to adopt new disclosure rules that will give investors the information they need to curb this deplorable practice.
In response, SEC Chairman Christopher Cox announced plans to force corporate boards to disclose more information about executive stock options.
Backdating may have violated a host of tax, regulatory and disclosure laws.
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