Backdated Stock Options and Boards of Directors: An Examination of Committees, Structure, and Process

Document Type

Article

Publication Date

11-1-2012

Department

Management and International Business

Abstract

Manuscript Type: Empirical Research Question/Issue: In this study, we investigated the effects of several factors related to nominating and compensation committee structure and process on the likelihood of employing backdated stock options. Research Findings/Insights: To test our hypotheses, we selected a sample of US firms that had been investigated for backdating stock options and a control group of similar sized US firms from the same industry that had not been investigated for backdating. Using an agency perspective, we found that when compared to companies within the same industries, firms using backdated stock options did not tend to utilize nominating committees, and structured their compensation committees so that they are smaller, and meet less frequently. We also found that their CEOs are more generously compensated. Consistent with agency theory, these findings indicate that companies using backdated stock option may possess compromised monitoring and incentive alignment mechanisms. Theoretical/Academic Implications: Despite being one of the most dominant management theories in recent history, little empirical evidence supports the validity of agency theory. In contrast to studies producing results calling into question the value of agency theory, we found significant results with regard to understanding the conditions under which agency problems might be promulgated. Also, our study contributes to the understanding of corporate governance by examining a variety of possible antecedents to the practice of backdated stock options and how boards and committees may be constructed to more effectively reduce the agency problem. Practitioner/Policy Implications: Our results provide important evidence concerning factors or situations associated with backdating, which will be instructive in designing remedies to curb such practices in the future. In particular, to reduce the likelihood of dating schemes such as backdated stock options, firms should consider utilizing nominating committees, and constructing committees with more members and requiring frequent meetings so that directors can be better positioned for the effective execution of their monitoring responsibilities of management.

Publication Title

Corporate Governance: An International Review

Volume

20

Issue

6

First Page

562

Last Page

574

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