Backdating Relief and Fairness

Stock-option backdating is a lot like global warming or the spread of killer bees. The story gets a lot of press because it sounds sensational, but in the end, it doesn't mean very much, and it's certainly not very dangerous. Consider that The Wall Street Journal's stock-option backdating table has data on about 165 companies that are currently looking into the practice or are already subject to SEC witch hunts on the subject. Yet there are more than 22,000 publicly traded tickers on U.S. exchanges. That means only 0.73% of companies have been caught up in this "scandal."

You'll pardon us if we don't run for the hills screaming.

In fact, we'd advise Fools everywhere to stop giving this overblown "issue" any more attention at all.

Even when stock-option backdating does occur, there's no evidence that it harms anyone. You'll see why when you consider how it works. Stock-option backdating occurs when a company uses backward-looking data to pick favorable grant dates, making the options "in the money." Obviously, if a stock is trading for $30 a share, but you can look back to when it was trading for $20, you can guarantee the recipient an immediate $10 gain in the options' value.

This is not only not illegal (technically speaking), it doesn't cost anyone anything. It's like finding free money to reward loyal employees and corporate officers for the hard work they've done in contributing to a firm's success. Shareholders would be nuts not to support this kind of compensation scheme -- unless they'd like to pay more cash, and I don't know too many shareholders who'd rather do that.

So why all the media-manufactured controversy? Because, thanks to confusing and complex accounting regulations, equity compensation that is granted in-the-money must be charged against income. But some CEOs, seeking to do the right thing for their employees and shareholders, didn't understand all the arcane rules.

For instance, Apple (NASDAQ:AAPL) CEO Steve Jobs approved the backdating of options, but where there's no harm, there's no foul. (The Apple board did an investigation and determined that, by the way.)

So Jobs was unaware of the accounting particularities. No one was hurt. On the contrary, the ability to attract and reward a first-class team is what has enabled Apple to sell millions of iPods and make thousands of Americans rich through the rise of Apple's stock. And remember, all the accounting restatements being made to rectify these issues will incur non-cash charges. We all know that cash is what matters.

On the other hand, the high price of the media-driven stock-option backdating frenzy is easier to see. For months, companies have been slowed down, or even paralyzed, as they succumbed to pressure to perform their own backdating witch hunts. UnitedHealth (NYSE:UNH) even had to lose the architect of its success, all because he presided over a few minor accounting errors.

How much time has been wasted, and how much CEO talent ushered out the door? The Institute for Defense and Indemnification of Organizational Talent has determined that the average company loses no less than $3 million, and as much as $15 million, per quarter.

"We at the Fool have always stood for accountability balanced with fairness," Motley Fool co-founder David Gardner says. "That's why we stand in favor of Section 8 of this bill. If a CEO was unaware of the accounting implications of backdating, there's no reason he should be punished, especially given that backdating is a victimless crime. Now is the time to leave this issue behind, and move forward, toward a brighter future for every American."

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