Monday, November 20, 2006

Fork It Over: Corrected

The Cheesecake Factory Incorporated (CAKE), proprietor of a chain of fine restaurants serving softball-size burgers and 40 kinds of cheesecake, just finished a review of its stock option grant practices.

In an 8-K filed Friday, Cheesecake admitted that from 1997 to 2001 there’d been unfortunate instances where it "misapplied the measurement date" of option grants, as the press release oh-so-delicately put it. Rest assured, though, they found "no evidence" anyone who backdated options meant "to deceive or mislead." (Apparently high-paid lawyers peered into the souls of those involved.) So far no one has lost his or her job, but the Audit Committee, which conducted the review, suggested it might be nice if some people reimbursed the company for the extra dough they got from the backdating. These cougher-uppers include CEO David Overton, former CFO Gerald Dietchle, and - gee, this is awkward - members of the Compensation Committee.

I guess the company thinks the outside directors who made up the Comp Committee, as administrators of the company's option plans, should have known better. And though the 8-K says nothing about this, perhaps it wasn't the best idea to put them in charge of their own option grants.

According the Wall Street Journal's handy-dandy options scorecard, there have been scattered reports of directors who benefited from backdating. I haven't researched this, but I doubt Cheesecake is the only place where folks on the compensation committee were allowed to grant options to themselves, so we may be hearing more about this kinky governance practice. (Intel, a corporate governance overachiever, skirts the conflict by giving CEO Paul Otellini - or, as they call him, "a committee consisting of the CEO" - control over options grants for outside directors. )

Bucking the 25-year craze that's gripped Proxyland and transformed the world of executive pay, Cheesecake now intends to put "less emphasis on equity compensation," at least for outside board members. I'm shocked - but gratified - to see a corporation admit that piling huge portions of stock options on directors' plates, under the cockamamie theory that this magically aligns their interests with those of the shareholders, is an experiment not worth repeating. The same, I suspect, goes for Chocolate Peanut Butter Cookie Dough cheesecake.

This post has been edited to reflect two corrections:

Correction #1: It turned out to be Cheesecake's former CFO, Gerald Dietchle, not current CFO Michael Dixon as I'd originally said, who owes profits on backdated stock options. Sorry, Mike. Your company "misapplied" some dates, and I "misapplied" your name. No harm, no foul, OK? Still friends? I still get that free serving of fried macaroni and cheese, right?

Correction #2: After some hasty and apparently sloppy research, I said that no outside directors had resigned over backdating. This was wrong.

If I find any more mistakes in this post, I promise to punish myself by eating an entire bowl of cookie dough, which will probably give me salmonella. OK? Happy now?