I appreciate the opportunity I’ve been given to post on this Harvard blog.

Appropriately enough, I’m going to start with a response to the work highlighted on this blog of Bebchuk, Grinstein & Peyer (BGP) in Lucky Directors and Lucky CEOs. As summarized in the Financial Times op-ed reproduced on this blog, BGP say their work “suggests [opportunistic timing of option grants] deserves all the attention it has been getting and more.” They show that backdating has produced significant gains, been widespread across industries, occurred mainly when the pay-offs were high (i.e., with larger gaps between lowest and median prices in the grant month), was correlated with evidence of CEO influence (in firms lacking a majority of independent directors and where the CEOs had longer tenure), and occurred where CEOs had more total compensation from other sources (suggesting, they say, that it did not substitute for other compensation). The director study shows that backdating was prevalent for outside directors. The authors conclude that “[t]he patterns we have studied reflect persistent, widespread and systematic governance problems” that “deserve investors’ full attention.”

Here I take issue not with the authors’ basic data but with their conclusions about what the practice says about corporate governance generally.

The important question is whether the backdating could be considered a form of theft. If it was, then this, indeed, indicates a serious governance problem. Moreover, the fact that the practice was evidently correlated with weak governance constraints (more entrenchment, fewer outside directors) suggests we should correct those problems.

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