Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Thursday, June 01, 2006

Stock Options Backdating and Unanimous Consents

There's an article in yesterday's Financial Times about stock options backdating. This continues to be an issue for an increasing number of companies. This particular article criticizes the use of unanimous consents to approve option grants.

A unanimous consent is used in lieu of an in-person meeting to approve certain corporate or committee actions. Typically, a UC is used only where the following conditions are met:

1. the item is non-controversial and in-person discussion is not needed;
2. only one item is being acted upon; and
3. as the name implies, the action of the board or committee is, in fact, unanimous.

Why would UCs be an issue in the world of stock option grants? It's because the date on the UC might not, in fact, correspond to the actual date of the action taken. In other words, a UC might "document" a stock option grant on April 1 when the date the UC is actually signed by the committee members several weeks later. And on April 1, the stock price might be low compared to the price on the date that the UC was signed by the committee members.

The best practice is to have the compensation committee meet and award options at the FMV as of the date of the meeting, or as of a a date slightly in the future. There shouldn't be much room for criticism, though, where the materials are prepared and circulated to the committee and the stock price corresponds in time to the price on the date the materials are prepared and circulated.

The SEC should be concerned about instances where the FMV on the date of the committee meeting is well above the option strike price and a stock price from several weeks past is used as the strike price.

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