Five billion dollars (U.S.) in profits wiped out, 150 companies under investigation, 50 executives ousted and five criminal indictments.
The toll on Corporate America's image could prove priceless as the once-obscure stock options backdating scandal grows.
Before it's over, as many as 1,000 U.S. companies could eventually come under scrutiny, some experts have predicted. Nearly 15 per cent of all stock options granted between 1996 and 2005 may have been manipulated to give recipients windfall profits.
Bruce Karatz, the chief executive officer of home builder KB Home, is the latest of dozens of executives to lose their jobs in the aftermath of the scandal. He resigned Sunday after an internal probe showed he was the main beneficiary of improperly dated options, costing the company at least $50-million.
Since 1992, Mr. Karatz has pocketed nearly $180-million on stock options -- notes that give holders the right to buy stock at a specified price.
The problem may also have spread to Canada, where BlackBerry maker Research In Motion Ltd. is being investigated by the Ontario Securities Commission and the U.S. Securities and Exchange Commission for the way it granted stock options.
What sets the backdating problem apart from the other scandals to hit the corporate world is that this one appears to be pervasive.
In a nutshell, here's how it works: Options give recipients the right to buy stock at a set price, usually the prevailing price at the time they are issued. If the stock rises, the options become valuable. These are known as "at the money" options.
This kind of compensation became wildly popular in Silicon Valley, where startups often had little cash, but bright futures. Companies could pay their top people relatively little by supplementing salaries with huge performance incentives. Many companies apparently got greedy. By backdating, or manipulating, the exercise date, companies discovered they could give executives an instant windfall at virtually no cost. They issued options that could be cashed in at a price below the current value, sometimes the lowest point in a particular year, or quarter.
Interestingly, these so-called "in the money options" aren't illegal -- as long as companies report what they are doing and claim the windfall as an expense for tax purposes.
And therein lies the problem. Many companies apparently hid what they were doing -- to fool investors, save on taxes, boost profits, or all three.
They didn't hide it from each other, however. A recent study by The Corporate Library, which does shareholder advocacy research, found interesting connections between the directors of many of the Silicon Valley tech firms at the heart of the scandal. They initially hypothesized they might find that companies shared the same accountants or compensation consultants. Instead, they found that a common thread was interlocking directorships -- the same individuals sitting on several companies -- and perhaps comparing notes.
"Director interlocking relationships are fast becoming what appear to be the most important characteristic and indicator of backdating problems," according to the report.
There is also a link between the options backdating problem and the various corporate accounting scandals of the past five years.
Too many executives and directors are finding clever ways to turn public companies into piggy banks.
Critics of Sarbanes-Oxley, the controversial post-Enron accounting law, have complained that all this new disclosure imposes too high a cost on honest businesses, pushing public companies into the shadows of private equity takeovers. They can't be more wrong. Sarbanes-Oxley may well be the reason that companies have been so quick to investigate their backdating problems, and deal with perpetrators. The law requires directors and officers to personally validate financial reports.
It's working. Companies are looking at their own practices and books, taking responsibility and coming clean with regulators.
Watering down Sarbanes-Oxley would be an invitation to let the culture of corruption and entitlement take root again.
