Gov't Probes: "Knee Jerk React" or Kick in the Pants?
Senior Editor, CNBC
KB Home is joining what's becoming a long list of companies caught up in the stock back dating issue. The home builder announced that it's under formal investigationby the SEC for improper stock option practices. The company CEO Bruce Karatz resigned (or retired) last fall over the backdating issue.
Right now--more than two hundred companies are under a similar microscope (including computer giant Apple). So--are the current regulations failing the system? Are tougher laws needed? Eleanor Bloxham is founder and president of the Value Alliance. She'd like more regulations in place. Howard Meyers, partner at Meyers and Heim and a professor at New York Law School takes a different approach (he's also a former SEC enforcement attorney). Both were on "Morning Call."
Bloxham says the recent probes show the benefits of Sarbanes-Oxley and that it also sheds a new light on internal control processes--especially compensation. She says it's important to look at a company's exec comp as much as it is to focus on a firm's financial numbers.
Meyers doesn't disagree too much ("Sarbanes is working") but he does express a need for control over the laws. He says there has to be a balance when it comes to regulations. He says the last thing corporations need are onerous laws. Meyers said there can't be a "knee jerk reaction to the scandal de jour" and that there needs to be regulations--but not the burning of corporate America.
Bloxham's reply? It's not knee jerk to enforce existing laws--and not out of place for the SEC to investigate. She says with the proxy season coming up--it's important for compensation issues to be taken seriously. (The proxy discloses important information about issues to be discussed at an annual meeting, lists the qualifications of management and board members, serves as a ballot for elections to the board of directors, lists the largest shareholders of a company's stock and provides detailed information about executive compensation.)
Follow up: CNBC's Hampton Pearson reports--KB Home says it is fully cooperating with government officials looking into the company's stock option practices. It's hired two new high level compliance officers and Karatz will pay back the company some $13 million.
FYI: backdating, which refers to the practice of altering the dates of grants, is a way for employees of a company to make additional money from stock options. While it's not necessarily illegal, in many cases it could be. Stock options give the recipient the right to buy a share of a company's stock at a price called the strike price, which is equal to the value of the stock on a certain date. If, for example, the strike price is $10 and the shares now trade at $15, each option would be worth $5. (The options would be worthless if the stock fell to, say, $7.) If an executive is able to change the grant date of an option retroactively--for instance, to when the stock was trading at a lower price--the options become more lucrative. That's what some corporations allegedly did. (Source: CNET).