Precognition or Prestidigitation

33

In 1992 the SEC required companies to publish awards of stock options. Unfortunately, they didn't specify when the companies had to publish them. The good news is that all the information about these awards wound up in easily accessible in online databases.
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; K$ p/ K7 f1 j& U0 ]9 Q, xErik Lie and Randal Heron, researchers at the University of Iowa, studyied the behavior of stock prices before and after option grants- looking closely at 5,977 grants between 1992 and 2002 (After 2002 Sarbanes-Oxley required that option grants be reported within two business days).

Their study results (published some time ago in the WSJ) could just as easily have concluded that the leaders of major public companies show clear evidence of precognitive abilities. After all, these prescient men and women unerringly  picked the ideal date to maximize their earnings on their stock option awards.
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/ I: R5 k& w/ _7 q/ gInstead of a psychic solution, our intrepid researchers were less creative and simply described the improbability that anything but slight-of-hand (backdating) was the likely cause of perfect timing thus setting off the more rounds of investigations and hand wringing that are continuing even as we speak.

Now all of this backdating activity isn't necessarily illegal (with some exceptions), but  it also isn't transparent to the typically naive stockholder, myself included, who fantasized that there was a measurable, rational and ethical relationship between performance and reward- at least in our publicly traded companies.
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It was even too much to hope in hindsight that HR leaders and compensation professionals specializing in executive compensation would have had serious public misgivings when trying to justify how favorable backdating strategies incented executives to higher performance. Now some of these same folks are Sarbanes-Oxley experts.
: x) a5 D. F! |: I8 N6 k: q. B5 F/ eIn my mind, compared to the crop of executives that have been giving leadership a bad name by systematically raping their stockholders, the Mafia is a poor cousin.

Hopefully, the transparency we seem to be moving toward by codifying some of these standards of behavior (warts and all) won't be temporary upward spike in a downward spiral.
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1 r4 g# ], v# `, L8 N- a0 [5 x5 y) |$ sEventually we might even get back to the challenge of measuring and rewarding performance and gaining the trust of our employees.

8 m9 Z% l; O7 r; s9 O, N) CWithout clear evidence that leaders in large companies can be trusted, more and more of the best an brightest will abandon them and the search for "quality" candidates will have to settle for whatever it deserves.