...Is stock option backdating ethically defensible? Background Stock options are widely used to supplement the amount of non-performance-based cash compensation for executives and CEOs. Furthermore, Bishara & Schipani state that stock options, “have long been touted as a way to align the interests of the executive with the shareholder…”(2008, p. 13) and thus provide, “greater incentives for executives to improve firm performance.” (Raiborn et al. 2007, p.1) However, due to the transactional nature of options that they can be cashed in there exists motivation for executives or firms to manipulate the price so as to receive the greatest gain. Prior to 2002, a company was not required to, “report the issuance of stock options until after the close of the fiscal year.” (Raiborn et al. 2007 p.3 ) As such many firms decided to retroactively increase the value of their share options, particularly executives options. However, by 2002, the time the control measure, Section 403 of the Sarbanes-Oxley act, was passed, 1 out of every 5 companies were suspected to still utilise the practice. Widespread backdating caused a media stir in 2006, with prominent companies such as Comverse and UnitedHealth being indicted. This caused a ripple through the business community as other organisation came under investigation. In 2006, 173 companies were purported to have retroactively altered the stock options of prominent members of their organisations. Retroactively dating options is defined as...
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...Why is backdating stock options done? What must companies do to make the action legitimate? Trying to find ways to increase the value of one’s personal bank account, inventive ways of accounting have become common place in business. Companies that trade stock on the open market have been known to issue stock options to the employees. It has been found that some companies wait until the price of the stock reaches the lowest point before issuing the stock options to employees to help to achieve the maximum gain from the price increase of the stock. While attempting to predict the lowest point of the price of stock the window is missed and the stock value begins to increase. Some executives have taken it upon themselves to backdate the stocks when they are being granted to senior executives. This is not an illegal action if the proper protocol is followed. Many companies failed to follow the protocol and chose to instead cover up the backdating. Proper protocol demands the action be disclosed in full to the shareholders as well as disclosing the action correctly on taxes and have it reflected in the earnings. When backdating stock options the results can cause lower than expected earnings if reported properly. This in turn can cause a company to miss the expected earnings levels and have an effect on the overall stock price and the earnings of the executives’ stock options. Prior to 2002 the practice of backdating was done several times by KLA-Tencor...
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...Business division. Qwest Communications International Inc. The company was also involved in accounting scandals, and was fined $250 million by the U.S. Securities and Exchange Commission (SEC), to be split into two $125 million payments due to the poor state of Qwest's current financial health. Among the transactions in question were a series of deals from 1999 to 2001 with Enron's broadband division which may have helped Enron conceal losses. In 2005, former Chairman and chief executive officer (CEO) Joseph Nacchio, former President and chief operating officer (COO) Afshin Mohebbi and seven other former Qwest employees were accused of fraud in a civil lawsuit filed by the SEC. Separately, Nacchio was convicted of 19 counts of insider trading in Qwest stock on April 19, 2007. On March 31, 2011 US Federal Judge Marcia Krieger issued a summary judgement rejecting all SEC's claims against Afshin Mohebbi and ruling in his favor. Adelphia Communications Corp. Pennsylvania-based Adelphia Communications ranked as the fifth largest cable company in the country before internal corruption and a $2.3 billion debt led to its 2002 bankruptcy. The Adelphia founders were charged with securities violations. Five officers were...
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... The reason for this being that the company wants to attract the best and brightest to their executive board. The NYSE also requires that the compensation encourage the top executive to align his interests with those of the shareholders. Specifically, he should create long-term value for the shareholders. The committee that determines the compensation can combine several features to achieve their goals. First, they can offer a base salary. The base salary is usually below $1 million, because the IRS will allow it to be tax deductible. The committee can also offer annual cash incentives for meeting annual performance objectives. Executive compensation can also include long-term stock-based incentives. Long-term stock-based incentives include stock options, performance shares, and restricted stocks. In addition, the CEO’s compensation can include “generous” retirement plans and extra benefits such as financial planning, life insurance, security services, etc. Executive compensation receives a great day of criticism. First, many do not agree with the large payouts that the package allows CEO’s. Some argue that a CEO only looks at the short-term objectives...
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...Enron Sharon R. Duncombe Professor Jamila Harris Business Law I – LEG 100 May 2, 2010 1) Describe how Enron could have been structured differently to avoid such activities. One of the reasons why the corporate governance system failed at Enron was because of the lack of good communication between the Board of Directors (BOD) and Top Management in Enron’s affairs. Various committees of the BOD were not doing your job, by not overseeing effectively the action’s of the company. “A good example is that the BOD was not aware of Michael Kopper’s involvement in Chewco even though he participated in a conference call with the members of the Executive Committee of the BOD.” This just shows the lack of effective internal controls, or it might just show you there was no such thing as internal controls. Many transactions were not approved by top management because of the lack of communication. Top management was lacking a lot of characteristics of a good management team such as not properly implementing and operating effective internal controls. There are many things, which could have been done to prevent the failure of the corporate governance of Enron. The BOD deals a lot with top management, we are sure that they knew something was going on, and they claim not enough information was being shared with them. One of their jobs is overseeing the functioning of the corporation and its management; with effective internal controls a BOD that is complaining of not enough...
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...What are the advantages and disadvantages of increasing the options granted to CEOs? The advantage of increasing the options granted to CEOs can be summarized as: options increase in value when the firm’s stock price increases so CEO’s wealth and incentives will be more closely tied to the shareholders’ wealth. The disadvantage is that option grants can increase a CEO’s incentives to game the system by timing the release of information to fit the option granting schedule or to artificially smooth earnings. Although backdating is illegal, some recent studies have shown that executives receive stock options that are already in the money. Is it necessarily true that increasing managerial ownership stakes will improve firm performance? First, although academic studies have supported the notion that greater managerial ownership is associated with fewer value-reducing actions by managers, there is no reason to expect a simple relation between ownership and performance. There are also other ways of managing the company. The correct ownership level for one firm may not be the correct level for another. Second, academic studies have shown a non-linear relation between firm valuation and ownership—specifically that increasing ownership is good at first, but that in a certain range, managers can use their ownership level to partially block efforts to constrain them, even though they still own a minority of the shares. What are the costs and benefits of...
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... Principle 1 Golden rule: Do unto others as you would have others do unto you. But the next example, the so-called Sopranoism, shows the limitation of this principle: Whack the next guy with the same respect you’d like to be whacked with, you know? (Source: Cathcart and Klein, 2007). Principle II Confucianism: Do not do to others what you do not want done to yourself. This is a rather robust criterion. But its limitation is that it says nothing about what you should do. Dilemma Ethical decisions often yield a dilemma. Suppose that you were the CEO of investment bank XYZ in 2005. The debt/equity ratio of the bank was 20. All of your competitors raised their debt/equity ratios to 30 to please the stock market so that their stock prices could be higher than otherwise would be. You knew that raising the debt/equity ratio to 30 was rather risky and could destroy the bank if business went wrong. But you knew the investors would be disappointed by the otherwise lower share price if you did not raise the debt/equity ratio. So, what is the answer? I do not have an answer for this kind of ethical question because it is a dilemma; otherwise, I would not use the word “dilemma.” All I know is that you, as professional managers, are expected to behave ethically. One thing I know for sure is that never do anything that will put you in a prison cell; you are too cute for a prison cell. • The Corporate Financial Manager’s Goals • Maximize profit? ...
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...short-term performance measures. - Long Term Incentives consisting in a mix of restricted stocks, stocks options and other long-term performance plans tied to shareholder return or financial performance. - Benefits plans. As a rule of thumb, the base salary constitutes 30% of total compensation, the annual incentive another 20%, the benefits about 10% and long-term incentives or the wealth creation portion of the compensation about 40%. Indeed, before the financial crisis, there was a lot of board attention to improving the relationship between pay and performance. As boards sought to achieve pay for performance, one outcome of the trend was to place more emphasis on performance vested restricted stock for the top executives. Thus, an increased portion of executive compensation was primarily tied to what, in the long term, most institutional investors tend to focus on: long-term performance as measured by total shareholder return or performance metrics that drive shareholder return. 2. SHOULD EXECUTIVES RECIVE STOCKS OPTIONS? Supporters of stock options say they align the interests of CEOs to those of shareholders, since options are valuable only if the stock price remains above the option's strike price. Stock options are now counted as a corporate expense (non-cash), which impacts a company's income statement and makes the distribution of options more transparent to shareholders. Critics of stock options charge that they are granted without justification as there is little reason...
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...A Blueprint for Corporate Governance Fred R. Kaen AMACOM AMERICAN MANAGEMENT ASSOCIATION A Blueprint for Corporate Governance This Page Intentionally Left Blank A Blueprint for Corporate Governance Strategy, Accountability, and the Preservation of Shareholder Value Fred R. Kaen American Management Association New York • Atlanta • Brussels • Buenos Aires • Chicago • London • Mexico City San Francisco • Shanghai • Tokyo • Toronto • Washington, D. C. Special discounts on bulk quantities of AMACOM books are available to corporations, professional associations, and other organizations. For details, contact Special Sales Department, AMACOM, a division of American Management Association, 1601 Broadway, New York, NY 10019. Tel.: 212-903-8316. Fax: 212-903-8083. Web site: www.amacombooks.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in-Publication Data Kaen, Fred R. A blueprint for corporate governance : strategy, accountability, and the preservation of shareholder value / Fred R. Kaen. p. cm. Includes bibliographical references and index. ISBN 0-8144-0586-X 1. Corporate governance. 2. Corporate governance—United...
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...FIDUCIARY DUTIES AND OTHER RESPONSIBILITIES OF CORPORATE DIRECTORS AND OFFICERS Morrison & Foerster LLP Christopher M. Forrester Celeste S. Ferber RR DONNELLEY EZ START XBRL We Tag. You Validate. We File. With the release of the proposed rule, the SEC will require the use of XBRL for financial reporting starting as early as 2009 for some companies. RR Donnelley is uniquely qualified to give you guidance on how your company can prepare for the SEC mandate. As the market leader in XBRL filings, we have been helping leading companies successfully tag and file XBRL financials since the inception of the SEC Voluntary Filing Program. RR Donnelley’s proven EZ Start XBRL full-service solution is designed to save you crucial time. With EZ Start, we do the initial tagging for you, reducing the time spent mapping and validating XBRL tags to under ten hours. Our goal is to transfer knowledge to your financial team to ensure a firm understanding of the taxonomies, mapping process and SEC requirements. To learn more, visit www.tryxbrl.com. FIDUCIARY DUTIES AND OTHER RESPONSIBILITIES OF CORPORATE DIRECTORS AND OFFICERS MORRISON & FOERSTER LLP Christopher M. Forrester Celeste S. Ferber RR Donnelley Global Capital Markets Copyright© 2008 Morrison & Foerster LLP (No claim to original U.S. Government works) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic...
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...Fall 16 AFM 431 -‐ Essay Group 9 Neeraj Venkatraman, Rahul Bhambhani, Steven Yang, Ahmed Husain, Dilraj Dhillon In today’s world, businesses have moved from complicated to downright complex. Firms, industries, and global business systems continue to invest in, employ, utilize, and revolve around many varying, technical, formal tools and mechanisms in the business world. In the context of global business, complexity can be loosely defined as the state of intricacy of interactions of people, objects, events, and transactions. The modern business world and the business environment is highly complex in its nature, and therefore transparency is essential for shareholders and investors to better understand their investments, as well as deter fraudulent behavior. The complexity in the modern business world, and its need for transparency can be evidenced through an examination of 3 levels: company-wide, industry, and globally. Looking on a company-wide basis, a lack of transparency on the part of individual organizations can lead to fraud and unethical practices, whereas a demonstration of strong transparency reduces the impact and likelihood of scandals. Enron, a leading energy and natural gas provider was accused of an accounting fraud in 2001. One of the primary reasons that led to this scandal was Enron’s usage of special purpose entities (SPEs) to cover up debt that the company was taking upon...
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...Stewart case: lessons and training 2 HEADING Shares sold in cases of insider trading often come from option exercises or restricted stock vesting. 3 Accounting scandals/fraud intertwined with insider trading. Insider trading cases more interesting to juries and easier for prosecutors to explain. Did the CEO sell stock knowing his company could not make its earnings targets without improperly booking revenue? 4 The SEC detects and prosecutes even small-profit cases. $38,000 in profits by former CFO. 5 Criminal charges are now more likely. Justice Department and local US Attorneys interested in these cases. Ex-Countrywide execs get probation terms for insider trading By ALEX VEIGA, AP Business Writer LOS ANGELES—November 26, 2007 Three former Countrywide Financial Corp. executives who pleaded guilty to criminal charges of insider trading were sentenced Monday to serve three years probation, the U.S. attorney's office said. They must also serve several hundred hours of community service and pay fines. In their plea agreements earlier this year, the executives admitted they used confidential data showing Countrywide would not meet Wall Street earnings projections for the third quarter of 2004. They then used the information to sell off their shares, to buy put options and, eventually, to short-sell the stock, in efforts to profit from a fall in the stock's price,...
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...Evaluation Darren Bahadur Barima Peprah Daniel Niedra Hubery Zhao Historical Plans Plan 1 (1998-2002) Although Braddock was a privately held company during this time, the long-term incentive plan involved a stock-based component (case Exhibit 4) and as well as an annual performance bonus based on the matrix illustrated in case Exhibit 6. The good * Since management compensation is tied to firm performance, managers are incentivized to keep costs under control and maintain profitability. However, it is important to balance cost-controls with long-term growth. * The 5-year measurement cycle provides an adequate horizon for management decision-making and should motivate managers to take on projects that add long-term value to the firm. * Although the exact calculation of the performance factor was not described in detail, the plan appears to be fairly straightforward and easy to understand for both managers and stakeholders. Furthermore, the inputs of the performance factor are common metrics and its calculation is likely a weighted average of these factors. The bad * With respect to the valuation of equity securities of a private firm, the American Institute of Certified Public Accountants has established guidelines for private firms using stock-based compensation plans to derive market value of equity. The guideline recommends three approaches: a market or relative valuation approach; an income or DCF-based approach; and, an asset replacement cost approach...
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...-the relationship of the leader to the board has a tremendous impact on the organization’s ability to fulfill its mission. -they work with to create the most effective, strong, and healthy boards possible to serve the organizations that they lead. -The chapters provide a brief overview of the best practice and its relationship to board development. -Join this journey of exploring the best practices of strong and effective boards. guiding the reader from a solid starting point of development by establishing role, purpose and function of the board to knowing and communicating the organization’s mission, vision and values. -Board members intentionally and routinely engage in mutual accountability, communication, evaluations and board development while taking the necessary time to process decisions eliminating unnecessary surprises. Boards unite and resolve to work together through change and transitions for the good of the Kingdom, the advance of the Gospel, and the prosperity of the organization. -to exhibit generosity as board members and to be outstanding examples of giving regularly and sacrificially to the church, college or organizations they serve in order to establishment a culture of board development that embraces the principle of “passing it on,” by developing new board participants that will lead to a strong and healthy future for the organization. - as a board member or as leader of an organization can take your present board environment and develop it into...
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...Chapter 5 Questions – January 31 1. Which of the following bonds has the greatest interest rate price risk? |a. |A 10-year $100 annuity. | |b. |A 10-year, $1,000 face value, zero coupon bond. | |c. |A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. | |d. |All 10-year bonds have the same price risk since they have the same maturity. | |e. |A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. | 2. Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond? |a. |Exactly equal to 6%. | |b. |It could be less than, equal to, or greater than 6%. | |c. |Greater than 6%. ...
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