What values and norms should guide the board of directors in protecting the shareholders’ interests?To examine these issues, we first discuss the role values and norms can play with respect to underlying corporate governance and the proper role of directors, such as .Beyond such negative controlling measures, a more positive empowering approach based on ethics may also be necessary.What ethical measures need to be taken to address the agency problem?The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample.We also find that a firm is more likely to begin to backdate option awards if directors concurrently receive a stock option grant.Corporate Governance and Backdating of Executive Stock Options Daniel W.
Our results are both statistically and economically significant.
For example, The Wall Street Journal (WSJ) recently reported that the board of United Health, one of the alleged backdating firms, allowed its former CEO, William Mc Guire, to choose the day of his own option grants, which resulted in several large option awards dated at the years single lowest closing price (Bandler and Forelle, 2006).
In addition, questions have been raised about the independence of United Health s board and compensation committee (Forelle and Bandler, 2006a).
3 Arthur Levitt, former chairman of the SEC, has referred to 1 For the list of firms under backdating investigations as reported by The Wall Street Journal, see Also see Glass Lewis & Co.
Yellow Card Brief Alert, January 3, There are accounting and tax consequences associated with backdating because retroactively dating options to achieve a low exercise price is equivalent to issuing in-the-money options. It is ripping off shareholders in an unconscionable way (Forelle and Bandler, 2006b).