Homestore's (NASDAQ:HOMS) rebuilding is almost complete, and the new model will be much more structurally sound.
Last night, the online real estate listings firm announced a settlement with the California State Teachers' Retirement System (CalSTRS), the lead plaintiff in a class action lawsuit charging Homestore with accounting fraud. Once the deal gets court approval, the company will fork over $13 million in cash and 20 million new shares of its stock to members of the class.
But just as important is its agreement to significantly strengthen its corporate governance policies. Homestore has promised:
- Requirements for independent directors and special committees
- A non-classified board of directors with two-year terms
- Appointment of a new shareholder-nominated director
- Minimum stock retention by officers after exercise of future stock option grants
- Prohibition on the future use of stock options for director compensation
The last item in particular addresses the flawed compensation system that lures many down the path of accounting fraud. With incentives tied to short-term price movements, three former Homestore executives were accused of setting up round-trip barter transactions with AOL Time Warner (NYSE:AOL) in order to inflate revenues to meet Wall Street estimates. As part of their settlement with the SEC, the three repaid some $4.5 million they had received from the exercise of their stock options.
Also encouraging is the attitude of the new management team. CalSTRS CEO Jack Ehnes says his group's objectives were to recover some of the losses caused by the stock's crash and institute meaningful corporate reform without harming Homestore's ability to thrive in the future. Thanks to management's cooperation, Ehnes believes those objectives have been met.
