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

• Author: J. Bret Becton,Peter A. Stanwick,Clarence Coleman,Steven A. Frankforter
• Published date: 01 November 2012
• Date: 01 November 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2012.00910.x

Backdated Stock Options and Boards of

Directors: An Examination of Committees,

Structure, and Process

Steven A. Frankforter, J. Bret Becton*, Peter A. Stanwick, and

Clarence Coleman

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: In this study, we investigated the effects of several factors related to nominating and compen-

sation 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.

Keywords: Corporate Governance, Board Composition, Compensation Committee, Nominating Committee, Executive

Compensation, Agency Theory

INTRODUCTION

Myriad corporate scandals in the past have increased

interest in the use of boards of directors to curb the

self-serving behavior of executives. This is certainly not a

new development as boards of directors have long been a

common internal control mechanism – one of the four basic

types of corporate governance mechanisms outlined by

Fama and Jensen (1983). While boards of directors have been

employed as an internal control mechanism for quite some

time, public scrutiny of executive behavior has increased

expectations of boards and committees, requiring more

extensive monitoring of policies and practices including

ethics codes, internal controls, and director performance

evaluations (Fram, 2005). All of these activities are directed

at reducing the agency problem, yet little research has

*Address for correspondence: Bret Becton, Department of Management & Interna-

tional Business, University of Southern Mississippi, 118 College Drive, #5077, Hatties-

burg, MS 36406, USA. Tel: 601-266-5819; E-mail: bret.becton@usm.edu

562

Corporate Governance: An International Review, 2012, 20(6): 562–574

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00910.x