Top corporate executives, including CFOs, who are implicated in the backdating of stock options (enhancing options' value by dating them earlier than the day on which they are issued) often lose their jobs and have less than half a chance of finding a new one compared to their non-backdating peers, according to a study conducted by researchers at the University of Texas, Pennsylvania State University and Texas A&M and published in the American Accounting Association's The Accounting Review.
To illustrate the impact of backdating on CFOs' ability to keep their current positions and to find a new one, the researchers looked at the career moves and prospects of a group of CFOs involved in backdating and a control group of CFOs who were not involved in backdating activity.
|Backdating CFOs||Control Group CFOs|
|Lost their jobs||24.8%||7.8%|
|Found a comparable position once they lost their jobs||18.7%||35.1%|
|Found any full-time corporate position once they lost their jobs||48.4%||83.8%|
"Frankly, our findings came as something of a surprise. After all, backdating stock options in itself isn't illegal, even if much of the accounting associated with it is," says Edward P. Swanson, a professor at the Mays Business School at Texas A&M. However, because the purpose of backdating options is to increase executive compensation payouts, boards of directors are increasingly concerned with shareholder backlash to any related earnings restatements, overall negative publicity and potential government investigations.
The study found that executives of companies undergoing official investigations were three times more likely to be forced out, while companies that issued earnings restatements were 13 times more likely to force out executives. Interestingly, but not necessarily surprisingly, the likelihood of an executive being forced out for backdating options went down considerably when members of the board of directors were also receiving backdated options.
However, the exact nature of the fallout from backdated options (restatements, investigation, etc.) did not impact a forced-out executive's ability to land another job. In other words, the backdating allegation itself is the problem for these executives' jobs prospects, not necessarily the ultimate outcome of that activity.
"We've heard a lot about the need to beef up regulation, along with a fair amount of skepticism that increased regulation will make any difference," says Swanson. "Our findings suggest that it doesn't take a massive bureaucratic effort to penalize higher-ups. Corporate boards appear to be willing to take action well before regulators bring their investigations to a conclusion."
Finally, companies that have faced public allegations of backdating stock options tend to reduce the prominence of these rewards in the overall executive pay package. Two years after a backdating allegation, companies had reduced the value of stock option grants by an average of 30%, compared to an 8% reduction among control group companies.