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.

Thinking Ahead

You never know when Greek mythology will make headlines. The founders of Cerberus Capital Management, the firm that’s taking Chrysler private, admitted they chose the name in ignorance of Cerberus’s prior life as a three-headed hellhound with the tail of a serpent. So what? It still beats lots of other corporate names we’ve come across of late: fake compound words like Idearc and CopyTele, meaningless jumbles of letters like DivX and Gensym, and mystical-sounding unwords like Eclipsys. And (sigh) Fifth Third Bancorp.

We have a new Greek-sounding best friend: Panacos Pharmaceuticals, Inc. (PANC). Panacos sounds like some sandals-wearing lyre-playing dude, but we can’t find him in Greek mythology nor locate any explanation from the company.

Anyway, Panacos just filed a nice little policy on stock option grants. When we spotted it in this week’s filings, we assumed it was penance for some horrific crime. But to our surprise Panacos isn't part of the backdating stampede, though in its proxy it did confess to an isolated stock option screwup so minor it hardly seemed worth mentioning.

In its new policy, Panacos promises to grant options only at real meetings (no unanimous written consents) and to use only meeting dates as grant dates. These are moves we’ve applauded elsewhere. The policy even tries to head off timing problems that could pop up with new employees:

“The new hire may be notified that management shall recommend to the Compensation Committee and/or the Board of Directors, as applicable, an award, but that Equity Award shall not be approved until the subsequent meeting and it shall be dated the day of the meeting."

We’re wondering how well this last part really works. Panacos is a small biotech company trying to produce a breakthrough antiviral agent; the kind of place, in other words, where people live for stock options. So it’s hard to picture employees signing on without some assurance that board approval of their options is as certain as a boob job in Beverly Hills. But we’ll give Panacos the benefit of the doubt because they’re obviously gunning for this month’s Squeaky Clean Award. (Contrast the way these guys and these guys fooled around with stock option grants for new hires.)

Pictured above is a toy Cerberus, manufactured in France and advertised as suitable for children as young as 3. If you know any Goth toddlers who keep biting the heads off their Elmo dolls, this could make a nice birthday gift.

Tight-Lipped

I’m addicted to Lost, though it's clear the show’s writers will never get around to answering all our burning questions. (For example, why can't Charlie, stuck on a mysterious island with a guitar and nothing else to do, teach himself a few more chords?)

There are many unanswered questions in Proxyland as well since the SEC stripped down the 8-K rules for disclosing CEO departure deals. Last week The Wall Street Journal’s Alan Murray wondered why Steve Heyer, CEO of Starwood Hotels and Resorts Worldwide, Inc. (HOT), readily gave up $35 million in severance even though the unfortunate hobby that got him ousted – sending friendly emails to young female employees – didn’t fall under the “Cause” definition in his contract. (BTW, Starwood, you might want to rethink that ticker symbol.)

Heyer’s explanation - “life’s too short” - didn’t convince Murray, who fears there's more to the story. But since Heyer is a married man we’re inclined to take his philosophical comment at face value. Still, it doesn't seem right that a board can lock itself in a room with a disgraced CEO, emerge with a deal and leave us guessing about the legal niceties.

Another company being coy with us is SafeNet, Inc. (SFNT). As you may recall, last fall SafeNet's board tossed out Chairman/CEO Anthony Caputo for options backdating and, in an unusual move, promised by the end of March to select one of two story lines: Caputo either was fired for “Cause” or resigned for "Good Reason." (In the meantime they got busy selling the firm to an outfit called Stealth Acquisition Corp, which completed its tender offer last Wednesday.) In the end, SafeNet filed an 8-K that throws off as much smoke as Lost’s goofy monster. Caputo didn’t get severance – au contraire, he's putting up money to settle a lawsuit against the company – but for purposes of exercising his stock options he was graciously treated as if he'd resigned, though not for "Good Reason."

So did Caputo's conduct constitute "Cause"? We think so, but nowhere in the documents did SafeNet use the C-word so the company's conclusion remains a mystery.

As Don Imus proved last week, some words are just too nasty to say.

Alphabet City

Today's hot business story is right out of Sesame Street: “Federated Steals Letter 'M' from Microsoft.” Federated’s new single-letter ticker symbol is apparently a coup. We don’t get this; going by one letter makes sense if you’re the head of a fictional spy network, but we like tickers that don’t tax our memory, like the ones for CVS (CVS) and IBM (IBM).

A different one-letter outfit, Ryder System, Inc. (R), recently filed an interesting Compensation Discussion and Analysis (CD&A). Interesting in a good way.

The people at Ryder – or R, as they prefer to be called – adopted some simple and sensible rules for granting options. If everyone followed these, maybe we’d shut up.

First, R’s Compensation Committee can no longer approve option grants by written consent; this can only happen at a real meeting, preferably with doughnuts and coffee. Second, the date on which the committee meets and grants the options must officially become…drum roll: the option grant date. You average the high and low sales prices for that day, and that's the exercise price.

It’s smart of R to recognize that having directors grant options at a meeting is much better, governance-wise, than sticking some numbers on a paper consent and asking them to sign it as they’re dashing off to the club. Consents are easy to fudge. (Just ask these guys.) Even if the committee members don’t meet in person but use, say, a phone conference, they can have a real discussion about who's getting how many options and why. But we prefer the in-person meeting; that way if there’s any question about the grant date the company has an audit trail - the grease-stained Krispy Kreme receipt.

You can't make everyone happy, though. Cookie Monster no like doughnuts. Cookie Monster like cookies.

Danger Signs

Poor Robert Iger. Being CEO of The Walt Disney Company (DIS) sounds like fun, but it can’t be nice to have so many enemies that your company spent nearly $600,000 on security for you last year. Your proxy statement, filed last Friday, doesn't disclose who's out to get you. I'm guessing it’s either Michael Eisner, still mad that you have his job, or some young parents who’ve been forced by their toddler to watch The Lion King movie sixteen times in one week and feel that in your case the “Circle of Life” should look more like a period.

Either way, the security perk attracted a fair amount of notice in the press. But here at Proxyland we are instead transfixed by a tiny nit in the company's Amended and Restated 2005 Stock Incentive Plan. (The plan was attached to the proxy because after two years Disney feels constrained by the limit on how much stock it can use and wants to more than double the number.)

As adopted in 2005 – before options "misdating" became as tiresome as Gilbert Gottfried playing that godawful Iago Parrot in Aladdin – the plan says:

"Date of Grant" means the date on which an Award under the Plan is granted by the Committee, or such later date as the Committee may specify to be the effective date of an Award.

At this point I’m a little creeped out by any clause in a stock option plan that defines a date as either (1) the date something really happened or (2) some other date we like. There’s a perfectly innocuous explanation for this definition, which is that it’s there for administrative convenience so the Compensation Committee can meet on a day that doesn't conflict with their golf schedules and award options that will be effective on some future date. This could even be a good thing; locking yourself into a future grant date, as we have pointed out, pretty much makes you a Boy Scout. If that's what they wanted to accomplish, however, they should smack their expensive lawyers around for bad drafting.

In the wrong hands the definition provides a possible loophole: The Committee could grant options today and then, if sales of Aladdin’s Math Quest plummet and the stock price falls, decide they granted them later. It's nice to read in the proxy that "the price of any stock option granted may not be less than the fair market value of the Disney common stock on the date the option is granted," but maybe they should also tell us what the meaning of "date" is.

For now we’ll just have to keep our fingers crossed and hope that evil Iago Parrot stays away from Disney Comp Committee meetings. Though if he flies into Mr. Iger's yard, he'll no doubt be shot on sight.

TIVO Time

Like most writers, I struggle with writer’s block. Right now, for example, my brain feels like a pint of Haagen-Dazs mint chip ice cream just removed from an expensive Subzero freezer. Eventually the stuff melts enough to let me scoop some out, but in the meantime there sits my slice of pie, naked and reproachful. As does my computer screen.

I envy the prolific writers at Microtune, Inc. (TUNE). In their last 10-K, the risk factors disclosure alone took up 18 pages. Understandable, perhaps, for a company that has enjoyed NASDAQ delisting, shareholder lawsuits, and a stock performance that looks like this.

On the last business day of the old year, Microtune unveiled the results of an internal investigation of its past stock option habits. The press release is so long and the story so packed with sordid details they ought to pitch it as an HBO mini-series.

In addition to the humdrum backdating practices followed at other firms - dating option grants weeks or months before the real grant dates - Microtune “regranted” a whole bunch of existing options at lower prices, pretended employees were hired and had options bestowed on them before they actually started working, let people play with exercise dates, gave former employees extra time to exercise options by keeping them on the payroll after they’d departed (recordkeeping a la Tony Soprano), changed performance goals after the fact, and fudged numbers in getting board approval.

Happily, the investigation concluded there was "no intentional wrongdoing" by anyone who’s now working there or serving on the board. It must be nice to have such a sunny view of human nature; the worst offenses seem to have pre-dated the arrival of the current CEO, James Fontaine, but many of Microtune’s directors were around for the earlier seasons of this drama. So when HBO options the show, you'll find me transfixed before my TV, eating pie a la mode.

Think Different

The stock options backdating scandal is getting monotonous, with 200 companies under some sort of option-y cloud. And now Steve Jobs is back, looking earnest in his long-sleeved black T-shirt as he tries to iExplain some other iProblems with Apple option grants. (We wondered back in October if there was more to the Apple story, so we’re feeling smug.)

After all this backdating, we all deserve a fresh and different scandal for the New Year. So I was overjoyed when I put my thumb into last Friday’s pre-Christmas pudding of SEC filings and pulled out a plum. (I hate these tired seasonal references as much as you do, but like bourbon balls on Christmas Eve, they’re irresistible. See, there I go again.)

Hawk Corporation (HWK) announced in an 8-K/press release that the SEC is raising questions about its "preparations for compliance" with Section 404 of SOX. (That’s the big nasty SOX section that says management has to make sure its internal controls over financial reporting are up to snuff.) The Commission is, it seems, curious about "transactions in Hawk’s common stock on June 30, 2006 by a stockholder that is not affiliated with the Company and the impact of those transactions as to when Hawk would be required to comply with Section 404." The Justice Department is sniffing around too.

This all sounds cryptic at first, but it’s not too hard to figure out what they’re talking about. If a company's "public float" – the market value of its common stock held by outsiders – is below $75 million, it gets to put off compliance with Section 404 for another year. The way the rules work, Hawk's public float got measured at the end of its second fiscal quarter – June 30, 2006, the date of those mysterious stock transactions. Voila. Apparently the SEC suspects Hawk of playing games to make sure its float stayed below the magic number on the magic measurement date.

Everyone's so afraid of Section 404 I don't doubt they’d go to great lengths to stave it off. If Hawk had the clever idea to monkey around with its public float number, I’ll bet you half a dozen fruitcakes some others did too.

Future Shock

I just waded through God knows how many documents companies dumped at the SEC last Wednesday and Friday. I expected to uncover dastardly deeds, but emerged from the Thanksgiving Twilight Filing Zone empty handed. Either companies have given up using holidays to hide bad news, or they decided to ignore Thanksgiving in favor of Germany’s Repentance Day, an occasion for "examining one's conscience."

So I’m reduced to posting about a company that did something commendable.

Norfolk Southern Corporation (NSC) , which owns freight train lines, chose the day before Thanksgiving to make public the agreement employees will be signing when they receive stock options early next year. Even though it hasn’t been accused of backdating, Norfolk decided to frontdate: It will grant options on January 26, 2007, with an exercise price of whatever Norfolk stock turns out to be worth on that date - the corporate version of Russian roulette.

In last year’s option agreement, Norfolk followed the more common practice of leaving the grant date open, so they deserve credit for making the process extra squeaky clean this year. I sense that Norfolk is an aspiring corporate governance goody-goody. In September it adopted a version of majority voting for directors. And the company’s new-ish CEO, Charles Moorman, lamented in an interview that "the public opinion of CEOs is down there with politicians and just above dog catchers." The way he's going, he might rise to the level of a proctologist or tarot card reader.

A CEO who sets the timing of option grants in advance can't bestow them whenever the spirit moves him - not even on special occasions like St. Swithin’s Day or the Anniversary of Portuguese Aggression in Guinea - and can't backdate to a date when the price was lower. If he wants to cheat, I guess he could try to release bad news right before the grant date, but he can't be assured there'll be anything awful to report when that date rolls around. (Contrast this with the handy backdating practice people call "bullet dodging," where management puts out distressing news on Monday, watches the stock price fall, and suddenly grants options on Tuesday.)

Of course, a CEO could always put on the "time helmet" from a famous Twilight Zone episode, travel into the future, and figure out when the stock is destined to be hammered. Though I could think of better uses for that helmet, like finding out what the weather will be like on Leif Erikson Day.

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?

Nice 'N Easy

Have you seen those cute "Life Is Good" T-shirts? I can’t understand how anyone can wear them; I’m sure that the moment I walk out the door in a T-shirt that says “Life Is Good” I will (a) get run over by a Mr. Softee truck and spend my last seconds on earth listening to that song, (b) be recruited to appear on a new reality show called "I Dated 100 Congressmen" or (c) realize I’m having one of those anxiety dreams where I’m out in public wearing nothing but a T-shirt.

But if I had stock in Ceradyne, Inc. I might put on a "Life is Good" shirt anyway. Here’s a company whose third quarter net income nearly tripled over third quarter 2005. Why? Because Ceradyne makes body armor, which the U.S. military seems at long last to have adopted as a fashion statement.

Unfortunately, Ceradyne’s management had to take a break from counting the bucks to file an 8-K about a little matter of stock option grants. But the 8-K and the press release that accompanied it only skim the surface. To get the full flavor you have to read the notes to the 10-Q, filed today.

Ceradyne's story supports my view that the popularity of backdating can be explained by its elegant simplicity. Until 2003 the company bestowed the power to grant options on a Stock Option Committee with just two members. One was CEO Joel Moskowitz. The other was a "non-management director," not always the same one. (Hey, at least it wasn't a one-person committee).

From 1997 through 2003, this esteemed committee approved 23 option grants, 22 of which were backdated. It didn't even bother to hold meetings, but approved the grants by "unanimous consent in lieu of meeting." This is where you write down some resolutions on a piece of paper and get all the committee members to sign it, which legally substitutes for a real meeting and saves on doughnuts.

There are two dates to keep in mind here: Earlier Date When the Stock Price Was Nice and Low and Later Date When the Consent Was Actually Signed. Whenever Moskowitz felt like it (Later Date), he and the other guy would sign a consent that said something like: "Resolved, that X, Y and Z shall be granted a bunch of options." Although the company’s account of events is artfully fudged, it appears the consents were simply backdated so it looked like they were signed on Earlier Date, which the company then treated as the grant date for all official purposes. Beautifully simple.

Unfortunately the accountants spoiled everyone’s fun by insisting that Later Date was the real grant date, so Ceradyne will take a $3.4 million charge. But with the war doubling their third-quarter sales to over $185 million, "Life Is Still Looking Pretty Peachy" at Ceradyne. As long as no one "Cuts and Runs."

Taking Heat

The Corporate Library made a splash recently with a study on options backdating that showed a "web of inter-relatedness" among directors of Allegedly Backdating Companies (ABCs). I could get all "English teacher" on The Corporate Library’s ass and point out that the term "web of inter-relatedness" is redundant (could there be a "web" of non-inter-relatedness?), but it’s Friday and I want to move on so this blogging thing doesn’t cut into happy hour.

Full disclosure: I haven’t read the study. I’d love to, but The Corporate Library is charging ELEVEN HUNDRED DOLLARS for the privilege. Some library.

There’s been a bit of bickering about whether the study has the facts right. But what it found, as far as I can glean without spending money, is that something like 40% of ABCs shared at least one director, vs. 17% of companies in some kind of control group. This could mean, the study suggests, that backdating "may have been spread by word of mouth, through the conduit of directors sitting on the boards of more than one company."

Much as we all love a big rollicking conspiracy, this one underwhelms me. I'm not surprised certain directors served on the boards of more than one ABC, but that doesn’t necessarily mean they spread backdating around like the latest YouTube video.

Let's try an alternate explanation. Companies with a laid-back attitude toward compliance tend to seek out directors with similar feelings, and vice versa. It’s like a high school clique: You sit in the lunchroom - or boardroom - with the crowd that makes you feel comfortable, and you’re sure as hell not going to invite some compliance-loving geek (who’s probably got something gross on his tray, like a sloppy Joe) to sit with you. So just because Mr. Oblivious J. Director served on the board of two or three ABCs doesn’t mean he’s the one who told them all to backdate options. It might just be that, in the natural order of things, he found his way to the boards of several companies whose CEOs shared a fetching devil-may-care attitude toward the rules.

I say this because the idea of a bunch of conspirators whispering the precious secret of options backdating strikes me as silly. No MBAs were harmed in the making of this scandal; we’re not talking Enron special purpose vehicles here. The most dunderheaded CEO could think of this one all by himself, and if he happened to be a bit handy with a pen he could execute the dastardly deed too. Easy as ABC, really.

Of course you shouldn’t listen to me, since I haven’t even read the report. Don’t ask me why, but I decided to spend the ELEVEN HUNDRED DOLLARS to heat my house this winter instead. Which might leave me enough for a sloppy Joe.

Smartypants

A long long time ago I heard this joke from my Econ 101 professor:

A physicist, a chemist, and an economist are stranded on an island with nothing to eat. A can of soup washes ashore.
The physicist says, "Let's smash it open with a rock."
The chemist says, "Let's build a fire and heat it.”
The economist says, "Why bother? Let's just assume we have a can opener.”

Not much for laughs, but economists think it's funny, which shows they understand their limitations. I have one economist friend who’s prone to blurting out things like, “I don’t know why anyone pays attention to our forecasts; we’re wrong most of the time.”

Enter the Wannabeconomists, a bunch of corporate law professors in an area of exalted legal scholarship known as “law and economics.” These guys believe in the rightness and majesty of economics and just wish people were smart enough to appreciate how the dismal science makes everything work beautifully in Proxyland, including CEO compensation.

Among my favorite Wannabeconomists are Larry Ribstein of University of Illinois College of Law (Ideoblog) and Stephen Bainbridge at UCLA Law School (ProfessorBainbridge.com). Neither has an economics degree, though Bainbridge has a master’s in chemistry and maybe doesn’t need a can opener anyway. Then there’s Geoffrey Manne at Lewis & Clark Law School (not an economist either, but he once taught Law & Literature), who blogs at Truth on the Market.

Ribstein (in a barrage of posts; here's one) and Manne are busy holding down the fort against what Ribstein calls "backdating alarmists." Girlishly giddy, as always, over the beauty of economic concepts, they insist the rest of us are getting our panties in a wad for nothing: This wasn’t about greed, but about retaining good employees; the behavior hasn’t really cost shareholders much; the stocks of backdating companies probably dropped only because the media made such a big fuss; there was no immoral intent because so many companies did it everyone probably thought it was OK; "it's likely the efficient market looked through the accounting;" and no one got overpaid. You get the idea. Oh, and, according to Manne, "THERE IS NO LIE" in options backdating. He put that in caps.

So they get in a blog-to-blog debate with another corporate law professor, Matt Bodie of Hofstra Law School, who attempts good-naturedly on PrawfsBlog to dispute the Wannabeconomists. His best moment is on the NO LIE thing: “Backdating is always a lie -- you are claiming something happened before it actually did. I am baffled that this basic conception can elude my esteemed interlocutors." Me too.

To back up Professor Bodie, here’s what backdater extraordinaire UnitedHealth Group, Inc. told its shareholders in last year's proxy statement: “Historically, the Committee has utilized executive stock options because a holder of an option benefits only if the Company’s stock price increases after the date of grant.”

Pants. On fire. Hot enough to blow open a soup can.

Fuzzy Words

Nice move, SafeNet, Inc. You filed your 8-K at 5:30:03 Friday afternoon, just before the SEC scribes headed home to their caves. So your document spent the weekend near the very top of the “Latest Filings” page, where it attracted the attention of anyone too lazy to scroll down. Like me. It reminds me of that episode of Barney where the fatso dinosaur hides behind a skinny tree trunk and can’t understand how the kids found him. And to think you’re in the security business.

It’s last Wednesday’s news that SafeNet (SFNT) Chairman/CEO Anthony Caputo and President/COO Carole Argo resigned after a rather leisurely inquiry into options backdating. But the terms weren’t disclosed until Friday's 8-K filing. Michelle Leder at Footnoted has the highlights.

I know, everyone's sick of me whining about employment contracts that booby-trap the definition of firing for "Cause," making it impossible to dump a failed exec without paying the full severance package. But this time there’s a twist: SafeNet made a deal with Caputo that buys them till March to meditate on whether or not he was fired for Cause, and more or less freezes the severance negotiations in the meantime.

The board may have noticed that the definition of Cause in Caputo’s 2001 employment contract was inartfully drafted from his point of view. For example, it only requires a "neglectful" failure to perform his duties, rather than "gross negligence," the more popular formulation. And it includes the "commission of any act of fraud, theft or dishonesty," which is pretty loosey-goosey as these things go. This is just the kind of sloppy lawyering that makes a board think crazy thoughts, like that options backdating could be a legitimate reason to fire someone.

You’ll be happy to know the SafeNet board has learned from this unpleasant episode. What have they learned? To sign new employment agreements that put them in a far weaker position. Yes, the Cause definition in the new contracts, like the one with President/COO Chris Fedde, replaces "neglectful failure" with "grossly negligent failure." (And even that doesn’t count unless they give the guy written notice of the screw-up and he still won’t clean up his act.) Even better, merely committing acts of "fraud, theft or dishonesty" will no longer cut it as Cause. Fedde would have to be "found guilty" of committing them.

I’m convinced SafeNet’s board was holding hands around the conference table singing the Barney song when it approved the new contracts. Shall we all join in? (For you childless types, the tune is the same as This Old Man.)

I love you
You love me
We're a happy family
With a great big hug
And a kiss from me to you
Won't you say you love me too?

I’d adopt that as Proxyland’s national anthem, but I’m scared big furry Barney will come crashing through my window and sue me.

Contract With the Media

You know what we hate? No, not greedy CEOs or incurious boards. What we really can’t stand are clever financial journalists who obviously have some clue what’s going on around here.

How’s a blogger supposed to keep her readers two steps ahead of the mainstream business media and – more crucially – get to feel like a smug smartass, when writers at the Wall Street Journal start acting like overachieving honor students?

We became severely depressed yesterday when we stumbled on this WSJ article by Charles Forelle and Mark Maremont about William McGuire, who’s about to be tossed from his CEO post at UnitedHealth Group, Inc. (UNH) for stock options backdating. Instead of just dazzling readers with the numbers – there’s a possibility here for a billion dollars in walkaway goodies – the piece parses the guy’s employment agreement, noting that it "takes a fairly restrictive view of what constitutes grounds for firing: in effect, either a felony conviction or repeated failure to remedy a serious problem despite repeated notices demanding that he clean it up."

Could the reporters be reading this very blog, where we’ve recently been ranting about this very subject? (Here and here and, with a slight twist, here.) Naah, no way. It's far more likely that the skull-shattering magnitude of McGuire’s impending reward blasted them into a parallel universe where newspaper journalists (a) are contract-reading geeks and (b) have a lot of time on their hands.

What I’m really saying is: Kudos to you, Wall Street Journal reporters! Well done! Sigh. Now if you’ll excuse me, I have a contract with the bottom of a vodka bottle.

Exploring Some Options

MEMORANDUM

TO: All Publicly Traded Companies

FROM: Christopher Cox, SEC Chairman

While our state-of-the-art recruiting video is bringing in applicants by the truckload, my staff here at the SEC is stretched a bit thin at the moment. So I have to ask a favor.

Anyone who has NOT backdated stock options, please give me a ring.

Much obliged.

xoxoxo

Chris

All Apologies

Yesterday Steve Jobs graciously apologized to Apple’s workers and stockholders for options backdating. Such goings on, he added, are "completely out of character for Apple."

Thank you, Steve, for adopting one of my favorite apology styles, subject of a post at my old blog. I apologize, of course, for linking to myself.

Some Options, Shuffled

So I’m a little mad at Apple Computer Inc. (AAPL) CEO Steve Jobs. Based on an "internal probe" (boy, that sounds unpleasant), Jobs knew about options backdating that went on between 1997 and 2002. The investigation concludes, however, that Jobs committed "no misconduct."

It's difficult to assess the degree of Jobs’s villainy, or lack thereof. If he gave the OK to pulling option grant dates out of thin air so some execs could get rich(er), that sure sounds like "misconduct" to me. But so far there's not enough information to know if that happened.

In early 2003 Jobs voluntarily relinquished all his unexercised options, 22 million of the suckers. (This was no vow of poverty; the options were immediately replaced with restricted stock that at last count was worth half a billion.) On the one hand, this makes him look cleaner because he didn't profit from the backdating. On the other hand, since from time to time he purports to have a conscience, I can't help wondering if guilt about backdating inspired him to throw the darn things down the toilet. Speaking of toilets, the company's lousy stock performance had rendered the options mostly worthless, so he made no financial sacrifice. But other Apple execs did hang on to theirs in the hope they'd eventually pay off.

Jobs's explanation, per the 2003 proxy, was that he wanted to "build shareholder value by reducing the Company's overhang." I have no idea what this means, but the man is a genius, so why should I.

The reason I’m mad at Jobs has nothing to do with this. My beloved iPod Shuffle, just over a year old, has started to skip when I'm jogging. For that, Mr. Jobs deserves a good “internal probe.”