Alan Murray writes in today's WSJ that the reportedly widespread use of backdated options for outside directors means we should be concerned about regulatory rollback. Specifically, he endorses Ira Millstein’s suggestion of a “grand bargain” to replace regulation, prosecution and litigation with more shareholder “power to oversee the companies in which they invest:
Make it clear, once and for all, that directors really do work for shareholders, not for management, by giving shareholders the power not only to remove directors, but also to nominate them, without engaging in costly proxy battles. The commissioners of the SEC are considering changes that move in this direction, and the business lobby in Washington has launched a determined battle to stop them. For corporate leaders, shareholder democracy may be a frightening prospect. But it beats the alternatives.
This piles a non-sequitur on top of an absurdity. The absurdity is the backdating so-called “scandal.” As I’ve written so many times, most recently here,there’s very little rain with all the lightning and thunder.
The widespread nature of the practice, highlighted in the recent and highly bruited Bebchuk et al paper, only confirms that many people in many firms did not really think they were doing anything wrong. This does not mean that they weren't doing anything wrong, but it at least should make us wonder whether it was really the crime of the century. Indeed, as I’ve written, the Bebchuk paper can be read to show no more than that “more successful, and therefore more powerful, executives are paying themselves more, and of course hang around longer.” There’s no indication that the practice actually increased executive pay, as opposed to making it a little easier for firms to pay what they would have already, or that the market was fooled by accounting earnings when the basic numbers about the options were disclosed.
The non-sequitur is that if there is a problem, more “shareholder democracy” will fix it. Obviously activist shareholders voting at elections wouldn’t have spotted this problem. However, they will surely use the journalistic frenzy to get leverage against management to further their agendas.
If anything, the backdating so-called scandal is another indication of why “democracy” is a mistake for corporate elections. In politics, we are willing to endure the excesses because the only thing worse than democracy is its alternative. In corporate elections, democracy puts politics and populism where it clearly does not belong.
Additional notes: If backdating really is a serious problem, with thousands of executives defrauding thousands of companies, or thousands of companies defrauding millions of shareholders, then doesn't it follow that we need strong regulatory medicine to deal with it rather than the placebo of more shareholder voting?
Of course there's lots of evidence that SOX ended the practice, in which case, do we need to do anything other than impose liability under existing rules where warranted?
And to the extent that SOX did not end the practice (which Bebchuk et al suggest may have been the case for outside directors who got backdated options), then shouldn't we be asking questions about the effectiveness of SOX 404 in spotting problems?
Just asking.
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