Let'em Eat (Cheese) Cake!

I’m not sure that I will ever feel the same again about the Godiva chocolate cheesecake that is an original concoction of The Cheesecake Factory. I have no taste for it anymore though I’m an avowed chocoholic.

My distaste has to do with the issue of options backdating. It’s not as glamorous as the HP pretexting flap, but it is just as illegal. Options backdating, put simply, is when a corporation grants an "in-the-money" option—that is, an option with an exercise price lower than that day's market price, according to Christopher Cox, Securities and Exchange Commission (SEC) chairman. Corporations misrepresent the date of the option grant to make it appear that the grant was made on an earlier date when the market value was lower (Wall Street Journal, September 6, 2006). By disguising an in-the-money option through backdating, the company avoids showing the option as compensation on its financial statements. Oh, and the person who obtains the option, the grantee, potentially realizes larger gains. If this sounds cheesy, it is in a very strict illegal sense.

It reminds me of Bobby Ray’s statement in Sweet Home Alabama, "A plantation by any other name is just a farm, but it does roll off the tongue a little sweeter now, doesn’t it?" Well, let’s just call this “corporate theft” though, admittedly, “options backdating” does have a more official ring to it.

The practice of options backdating began in the early 1990s. At that time, Congress and the SEC addressed the issue of executive compensation, and Congress signed off on SEC rules that were intended to make executive pay more transparent. Unfortunately, the law was deficient in achieving this purpose, and, ironically, led to the prevalence of stock options increasing in executive compensation packages. And with that increase in stock options came a corresponding increase in abuse.

To mitigate harm, the Sarbanes-Oxley (SOX) Act of 2002 tightened up a corporation’s reporting of stock option grants by requiring real-time disclosure. And in 2003, the SEC required companies to publicly disclose the material terms of their stock option plans to shareholders for their approval. As a follow-on, in 2004, accounting rules favoring stock options issued at-the-money were eliminated (Accounting Rule FAS 123R). Most recently, in January 2006, the SEC passed “new executive compensation rules that now require a complete quantitative and narrative disclosure of a company’s executive compensation plans and goals,” according to Cox. The SEC will issue complementary accounting guidance on this subject in the near future.

What’s the impact today? The SEC’s Division of Enforcement is currently investigating more than 100 companies concerning fraudulent reporting of stock option grants, and the FBI is handling 45 investigations on this topic. Five indictments have been handed down thus far, and one former executive is on-the-lam, as in AWOL. Companies being investigated span multiple industries, are located throughout the country and include firms of all sizes, one of which is—you guessed it—The Cheesecake Factory.

We’re not talking small sums here either, folks. Broadcom has disclosed its erroneous reporting may total $1.5 billion. Billion. That’s a lot of cheese.

Public relations practitioners are often involved in writing the narrative of corporate annual reports and should know, or at least be aware of where to resource, information concerning SEC rules in order to avoid liability.

Art Stevens, APR and Fellow of the PRSA, is already advocating that a corporate reputation oversight committee be mandatory for publicly-traded companies. According to Stevens, the primary function of a corporate reputation oversight committee would be “to guard, restore and maintain a company’s reputation and trust among its constituencies. It would research and evaluate the manner in which a company does business and how it communicates it.” Studies do show that consumers buy services and products from companies they trust—and creating trusting relationships is what public relations is about, after all.

I’m not sure if this dramatic paradigm change to the profession will help get corporate big cheeses under control. But one thing I know, I’m going to make it a routine habit of curling up with my SEC rule book, so I at least can avoid being toasted cheese. And I will recommit myself to doing my part so that corps don't leave shareholders eating (cheese) cake.

Question of the Week: Do you think creating a mandatory corporate reputation oversight committee will solve corporate fraudulence?

Linda@thesaltlick