Communicating with Financial Analysts about Stock Options Backdating

Most Financial analysts (Buy and Sell Side) are likely aware of the inquiry from the SEC into your company. Your Investor Relations organization has to be:

a) Proactive about communicating

b) Forthright with what they know and dont know

c) Resist speculating the outcomes and possible causality

d) Be clear about timelines and milestones

e) Be honest about impact to employee morale, customer momentum and partner/supplier concerns.

Address these questions below in a clear, concise manner and you will have a better crisis handling experience:

1. Will the restatement have a material impact on your previous years earnings, revenues and cash flow, balance sheet, etc.?

2. What is the extent of the options backdating? How many instances and how long was this going on?

3. Have you formed a special committee to look into the matter? Who in the Board of Directors is heading up the audit committee? What experience do they have in dealing with crisis of this magnitude before?

4. What has your reaction from empoyees been? What actions are you taking to prevent mass exodus?

5. Are you going to lower earnings estimates and revenue targets since management will be distracted to solve this issue?

6. What are implications from a legal standpoint? How exposed are your Directors? What is the level of your DOE insurance?

7. What about customers? Are they concerned and what is their level of concern?

8. When do you expect to complete this process of investigation? What are the key milestones we should track?

9. Who all are going to be fired / let go because of this issue?

10. What is your process to continue ongoing communication with us on this issue?

Your IR and Finance team will not have all the answers, but these questions need to be brainstormed before you have the call with the analysts.

http://blog.vangal.com

options backdating | stock option backdating

The Real Big Picture Around Options Backdating

If you take some time to think about the big picture story around options backdating, here are some patterns that emerge. Each is valid, and has some merit, but it gives you some reason why the general public is still not interested in the story and outraged by it, but the media and some institutional investors are.

1. CEO and Executive pay: Realistically speaking this is a weak argument at best. CEO pay has always been big and its getting bigger because lot of these executives have big risk jobs and are responsible for millions or billions of $ and thousands of employees. Add to this the legal ramifications of doing a bad job, their job is not easy. Fortune’s Rick Kirkland wrote a piece on CEO pay and its an interesting read, but still does not offer any solutions.

2. Full Disclosure of pay for executives: SEC chairman Christopher Cox has stated full disclosure guidelines will be issued soon, and the “perks” that executives get do add up, but still this argument is also not very strong. There will always be the CEO parachute deals, and tax perks etc. Again we fail to see this being the big change force.

3. Better internal controls: Most companies before SOX did not have the best internal checks and balances processes for ensuring these “issues” were tracked, reported and managed. Accounting, Finance and Legal were mostly “side roles” to Sales, Marketing, Manufacturing and Engineering. Lack of internal controls is an issue for most companies that they need to fix. Its in our opinon this is a good but not the big “a-ha” compelling argument.

4. Poorly stated guidelines around gray areas: That’s why they are called gray areas in the first place. Most auditors and legal firms use “judgement” around these areas such as grant and enforcement dates for options. The SEC’s has stated they will have better guidelines around summer ‘06. This is also not a compelling argument for backdating not getting a bigger attention and outrage from the public.

5. World cup Soccer: (grin) - We made this up. Newsweek had a piece about why this time the world cup soccer has more attention of Americans. This is by far the most compelling argument why the general public does not care much about the options backdating story.

http://blog.vangal.com

Mukund Mohan is the CEO of Vangal a consulting company focused on helping companies with the stock option backdating issue.

adam reeves | greg reyes

Ramifications of the Options Backdating Scandal for 2007; Some Questions

What are the top 3 ramifications of the options backdating scandal?

If you remove the usual tax consequences, shareholder lawsuits, restatement, etc. What things do we see coming down in terms of legislation/new rules and regulations and where are the opportunities?

1. Revisiting Executive compensation: It supposed to be aligned with shareholder, but as examples of Cyberonics points out, not exactly. We see examples of Google, Apple and Yahoo paying their Chief Executives only $1 as their pay and rest in options compensation. Will this change? Will companies completely stop paying salaries? Or will they stick to giving options to top executives alone?

2. Board of Director accountability: Boards do have a responsibility to shareholders. Would we see an increase in number of boards requesting higher coverage from D&O insurance? Are boards going to have their own “internal spies” in each company to help report on internal controls audits? Will board members request oversight and have responsibility over internal policies and procedures?

3. Fewer people use stock options: Many companies have started to reduce overall the number of stock grants and options to employees. There are many reasons, including expensing of stock options, backdating scandal, etc. What other alternative forms exist of incentive pay? Restricted stock has the same problems as options, i.e. if priced at the wrong time, they will have potential to drain stock holder value.

4. Audit responsibilities: Many clients we have currently deploy another set of auditors (besides the one they already use) to have an “independent” third party for internal investigation. Will this continue after the backdating has been squared away? Is there a need for a auditor to audit your auditor?

Interesting questions.

http://blog.vangal.com

backdating options | greg reyes