The idea behind backdating options would initially appear to be one that has positive outcomes. Companies will offer their employees stock options as part of an incentive program within the company. They will set a price for the employee so that in the future, the employee can continue to purchase stocks at the same price. The company will simply backdate the options, which means they alter the date the grant options were issued.
Inherently this doesn’t seem to be a problem until we tackle a few examples that show how this action is quite unethical. Steve Jobs is a famous example of someone who was accused of backdating options (Worstall,T). The problem stemmed from the fact that CEO’s were being given backdated options as rewards and incentives. Stocks which then shot up in value, granting and instant amount of money to the CEO’s. It’s unethical from the simple standpoint that it’s money that they received unfairly from the public. Brocade Communications is another company that was brought under fire when claims of backdating options were filed (Yermack, D).
When companies backdate options, and they have every right to do so, they must report those to the public as a financial incurrence (Curtis, G). The public needs to have access to the proper information regarding their stock portfolios. People invest vast amounts of money into their stocks under the pretense that they are receiving accurate reports about the company they are investing in. It is unethical for the company to keep these expenditures from the public. David Yermack writes that the biggest problem is the potential for abuse. He claimed that CEO’s, or anyone with options available will “grab whatever profits they can get away with.” (Yermack, 7).
References
Curtis, Glenn. "The Dangers Of Options Backdating | Investopedia." Investopedia. N.p.,
2006. Web. 29 Apr. 2016.
http://www.investopedia.com/articles/optioninvestor/07/options_backdating.asp
Worstall, Tom. "Steve Jobs Obituary." Forbes. Forbes Magazine, 6 Oct. 2011. Web. 29
http://www.forbes.com/sites/timworstall/2011/10/06/steve-jobs-obituary-the-
backdated-options-scandal/#72cb2a652da7
Yermack, David. "Good Timing: CEO Stock Options." N.p., n.d. Web. 25 Apr. 2016.
http://pages.stern.nyu.edu/~eofek/PhD/papers/Y_Good_JF.pdf
