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Options backdating, the latest scandal to hit corporate America, may be more widespread than anyone is willing to admit. If thats true, what can be done to prevent this fraudulent practice in the future? Can information technology be used as a backstop?
Ostensibly, the practice of granting options to executives serves as a carrot, giving them a stake in the companys success. They receive this additional compensation only if the firms share price rises. Options for executives typically are granted by the board or its compensation committee.
The strike price, or exercise price, of the option is the companys share price on the date the option was granted by the board. The options become vested, or exercisable, usually after a specified period, often one year from issuance.
The problem arises when a companys chairman, CEO or CFO looks the other way while the options are backdated to an earlier date when the firms share price was at its lowest closing price for the year.
One reason for the failure is that boards tend to rubber-stamp options grants, viewing their issuance as little more than a routine corporate function.