Paul Danos, Dean Tuck School of Business at Dartmouth.
Here in the U.S., there has been a lot in the news lately about companies that quietly or secretly backdated executive stock options (timed so that the executives could realize ‘gains’ that had, in fact, already happened). My expertise is not in stock options, but with a background in accounting and a responsibility for imparting strong ethics in future business leaders, here is my take:
First, some are quick to use this as a reason to condemn all stock options. Frankly, this current back-dating problem doesn’t have anything to do with whether options are (or are not) a good tool for motivating executives. I’m not particularly high on using options because the actual returns on options can come in very spotty ways; sometimes you go years without any value and sometimes you get a big windfall. I think restrictive stock is much better. And now that options must be expensed as compensation, the entire practice is being used less.
But the issue is a useful example of the ways that business education can prepare students for future, yet-to-be-invented questionable practices.
The root of the problem with backdating is the lack transparency about the transactions. Some of the backdating may very well have been criminal, but most would have been proper if they had been completely revealed to shareholders in broad daylight at the time.
Five or ten years ago, not many of us would have predicted that backdating would become a problem. But if you start out saying the basic rule in dealing with stockholders is to be completely transparent about compensation, then most potential problems are solved. I think transparency is the thing you have to teach the students; that basically you must be as transparent as possible in every way when it comes to accounting and finance matters. To the extent that you aren’t, you may be accused of trying to deceive. This does not deny that there are many complexities in today’s compensation procedures and we must also make all readers of financial statements aware of the complexity. Transparency is the antidote to misunderstandings.