Monday, January 28, 2008

Tools of the Trade

In the Sweeney Todd movie, everyone is pretty villainous except the young lovers, who are so achingly dull they don’t count.

The options backdating scandal presents its own assortment of villains. (Backdating popped into my peripheral vision last week, thanks to a guilty plea by a Broadcom executive, the SEC deal with Monster Worldwide’s former CEO, and the Tyson Foods shareholder settlement I mentioned at Footnoted.) In addition to self-enriching CEOs and clueless or complicit compensation committees, many HR heads and in-house lawyers assisted in the backdating process. (In the movie version, the lawyer role should go to that guy who plays unctuous sidekick to the evil Judge Turpin in Sweeney and also unctuous/sniveling sidekick to Lord Voldemort in those other movies.)

But there’s yet another villain in the backdating story: a legal document known as the "unanimous written consent in lieu of meeting" or "UWC." This role will be hard to cast, but I’m thinking Keanu Reeves, maybe? Anyone that wooden can surely play a piece of paper.

I played up the link between UWCs and options backdating a while back (e.g., here and here) and the government has noticed it too. For instance, the UWC monster reared its head several times in the Monster complaint. Here’s how it worked. Someone would type on a piece of paper: "Resolved, that we’re granting x billion options to Mr. Terrific” and send it off to the compensation committee in "counterparts." This meant that each director got his own separate copy of the resolution with a place to put his signature. After everyone returned a signed copy, which may have taken a while, some corporate lackey would staple all the signature pages together and voila, the options grant was unanimously approved.

So what would be the grant date for Mr. Terrific's options, then? The answer seemed delightfully fuzzy, making UWCs a popular backdating tool. But as the spoilsports at The Corporate Counsel have since pointed out, a UWC shouldn't be effective before the last director signs, and no way can you slap on some fake "as of" date just because you like it.

Yes, many firms used UWCs as an excuse to pick grant dates out of the air, additional proof that backdating schemes did not require the evil ingenuity of a Judge Turpin or Lord Voldemort. Mainly, they required (A) a calendar and (B) a pen. It would have been great also to have (C) an accountant who would treat the options as in-the-money and (D) a lawyer to excise from the proxy any BS about the magical incentivizing effect of future stock option appreciation, because backdated options came pre-appreciated. Of course, heroes like C and D weren't on the scene, though we may see them in an alternate ending on the DVD.